Edited version of private ruling

Authorisation Number: 1011769870365

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Ruling

Subject: Permanent Establishment (PE)

This ruling applies to: Company X

Question 1:

Is Company X exempt from Australian income tax on income derived in Australia by virtue of the fact that the activities of Company X in Australia do not create a permanent establishment under the tax treaty between Country Y and Australia ( 'the Country Y Convention') contained in the International Tax Agreements Act 1953 (ITAA 1953)?

Answer

Company X is exempt from Australian income tax on income derived in Australia under the

Country Y Convention by virtue of the fact that the activities of Company X in Australia do not create a permanent establishment for the purposes of the Country Y Convention.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Organisation of Company X

Company X is incorporated in Country Y is exempt from Country Y income taxes under the relevant laws. Company X is a resident of Country Y for tax purposes and satisfies all relevant requirements in order to benefit from the Country Y Convention.

Company X operates in various countries worldwide.

Management of Company X

The Board of Directors of Company X has established major organizational units under the company's Constitution and Bylaws.

These major units which are based in Country Y implement programs to effectively carry out the activities of Company X worldwide.

All contracts relevant to the business proper of Company X are concluded in Country Y.

The world wide activities of Company Y are carried out under the strict control and guidance of one of the major units based in Country Y.

Australian operations of Company X

Company X is registered as a foreign company in Australia and has a registered office in Australia. The office only functions as an address for delivery of official documents but no activities of Company X are carried out at this office.

All of the activities of Company X in Australia are performed by volunteers. In this regard, meetings are held in various Australian venues by the volunteers in carrying out their activities. Such meetings are organised and sponsored in Country Y. The time, content and agenda for the meetings are decided upon by the volunteers. The meetings are not regular in terms of their frequency. Also, the same venues are not used to hold the meetings.

Any contracts or agreements entered into with a venue operator for the use of a venue, facility etc. is undertaken by the Australian volunteers on behalf of Company X.

The volunteers do not perform their role on a full time basis.

Employee of Company X

In the income year under consideration, an employee of Company X, resident in Australia, worked from his or her residential premises for a short period of time.

The employee's work in Australia predominantly involves the undertaking of market research aimed at refining the market strategies of Company X. The employee's essential functions include the collation, analysis and summary of competitive market intelligence relevant to the activities of Company X.

The employee will also have the authority to make decisions on day-to-day operations of the market and any expenses associated.

Funding of Australian activities of Company X

A payment from Country Y based on the extent of activities in Australia is the main source of funding for the Australian operation of Company X.

The Company X policies provide that, all units of Company X run by volunteers worldwide shall have the right to obligate their budgeted funds for all purposes necessary to promote their 'approved' objectives. However, no such unit shall have the authority to contract debts for, pledge the credit of, or in any way bind Company X with respect to any matter or activity not approved by the Board of Directors of Company X.

Relevant legislative provisions

International Tax Agreements Act 1953 Schedule U Article P

International Tax Agreements Act 1953.Schedule U Article T

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

These reasons for decision accompany the Notice of private ruling for Company X.

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

Summary

It is considered that Company X does not have a permanent establishment in Australia pursuant to carrying on its business through a fixed place of business in Australia for the purposes of the relevant provisions of the Country Y Convention.

Company X is not deemed to have a permanent establishment in Australia in respect of its dependent agents in Australia pursuant to the relevant provisions of the Country Y Convention.

Finally, for the purposes of the relevant provisions of the Country Y Convention, which are concerned with the activities of independent agents, Company X is not deemed to have a permanent establishment in Australia.

Consequently, for the purposes of the Country Y Convention, Company X does not carry on its business in Australia through a permanent establishment in Australia.

Detailed reasoning

Permanent Establishment (PE)

The existence of a PE is the decisive condition under tax treaties in general for the taxation of the income of an enterprise from business activities and of capital pertaining to such activities.

Australia's right to tax the income from business activities and of capital pertaining to such activities of an enterprise of Country Y is subject to the provisions of the Country Y Convention.

According to the relevant provisions of the Country Y Convention, Australia may tax the income derived by a Country Y enterprise only to the extent that the enterprise carries on a business in Australia through a PE situated in Australia.

In general, the question of whether a non-resident enterprise has a PE in Australia is a question of fact and degree, which must be determined by reference to the individual circumstances of each case with relevance to the provisions of the applicable tax treaty.

The guidelines for the determination of a PE in respect of a Country Y or Australian enterprise under the Country Y Convention are contained in Article P of that Convention.

Taxation Ruling TR 2001/13 discusses the Commissioner's views about interpreting tax treaties. Paragraph 104 of TR 2001/13 provides that the Commentaries on the OECD Model Tax Convention on Income and on Capital (OECD Commentary) provide important guidance on the interpretation and application of the OECD Model and will often need to be considered, as a matter of practice, in interpreting tax treaties.

The 2010 OECD Commentary in relation to Article P of the Country Y Convention is summarised below with particular relevance to Company X's conduct of its activities in Australia:

1. The definition of a PE as a 'fixed place of business' contains the following conditions, namely:

(a) the existence of a "place of business", i.e. a facility such as premises

(b) this place of business must be "fixed", i.e. it must be established at a distinct place with a certain degree of permanence;

(c) the carrying on of the business of the enterprise through this fixed place of business. This means usually that, persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated.

The OECD Commentary further explains that the 'place of business' may be situated in the

business facilities of another enterprise.

2. Where the nature of the business of an enterprise requires the conduct of its business activities at different locations, the particular area within which the activities are moved may be identified as a ' single place of business'. This is, provided there is both commercial and geographical coherence in respect of the conduct of the business from various locations. For instance, a pedestrian street, outdoor market or fair in different parts of which a trader regularly sets up his stand represents a single place of business.

3. Where the area (within which business activities of an enterprise are carried on at different locations) lacks the necessary geographical coherence, each location needs to be considered separately in determining the existence of fixed place of business.

4. For a place of business to constitute a PE, the activity need not be of a productive character, however, the activity must be carried out on a regular basis.

5. Where activities constituting a business are carried out exclusively and wholly in a country from a fixed place of business, the short duration (less than six months) of the business will not preclude the existence of a PE in that country.

6. In distinguishing between activities which have a preparatory or auxiliary character and those which have not, the decisive criterion is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activities of the enterprise as a whole.

The activities of Company X in Australia are not conducted through a fixed place of business for the purposes of Article P, in relation to:

a) The registered office of Company X located in Australia:

Other than being used as an address for official documents no activities whatsoever of Company X are carried out at this office.

b) Meeting venues in Australia in the nature of restaurants, hotels and other public places where the activities of Company X are carried out:

The aim of these meetings is to promote the activities of Company X in Australia and thereby the business of Company X.

However, the various venues that are used for conducting the meetings lack the necessary geographical coherence to constitute 'a single place of business'. On the other hand, due to the variety of venues used to hold the meetings in Australia, as advised, each venue is not used regularly enough to constitute a place of business on its own. Accordingly, a fixed place of business cannot be determined in respect of any of the venues in Australia where the meetings in question are held.

c) The Company X employee's residential premises in Australia:

An employee of Company X worked from his or her residential premises in Australia in the income year under consideration. The employee undertook market research and analyses to build and maintain a functional, company-wide market and competitive intelligence database to assist in the refinement of market strategies for Company X.

It is considered that the activities carried out by the employee do not form a significant part of the business of Company X as a whole. This is due to the fact that the activities under consideration have a major purpose of collecting information and also have a preparatory or auxiliary character, such as research for refining Company X's market strategies in terms of its expansion.

Therefore, although the activities in question may have been carried out exclusively and wholly in Australia, and accordingly the premises at which they were conducted may constitute a 'fixed place of business', this will not lead to the existence of a PE of Company X in Australia.

The maintenance of a fixed place of business to conduct activities for the collection of information or conduct activities of a preparatory or auxiliary character is specifically excluded from the definition of a PE by virtue of relevant provisions under Article P of the Country Y Convention.

In conclusion, it is considered that Company X does not have a PE in Australia pursuant to carrying on its business through a fixed place of business in Australia for the purposes of the Country Y Convention.

If a Country Y enterprise does not conduct activities itself through a fixed place of business in Australia, it may still, in some circumstances, be "deemed" to carry on business through a PE, under the other relevant provisions of Article P in the Country Y Convention.

Relevantly, under Article P of the Country Y convention, a Country Y enterprise is 'deemed to' have a PE in Australia if the following four conditions are satisfied:

a) there is a person acting on behalf of the Country Y enterprise in Australia, and

b) that person is not an independent agent to whom Article P also applies, and

c) the person (dependent agent) has authority to conclude contacts on behalf of

d) the enterprise, and

e) the authority is habitually exercised.

An exception to the above rule is that the activities of the dependent agent are limited to those mentioned in the relevant paragraphs of Article P of the Country Y Convention.

The OECD Commentary corresponding to Article P of the Country Y Convention raises the following salient points, in respect of a dependent agent's authority to conclude contracts on behalf of the enterprise:

· Persons whose activities may create a PE for the enterprise are so called dependent agents i.e. persons, whether employees or not, who are not independent agents.... Such treatment is to be limited to persons who in view of the scope of their authority or the nature of their activity involve the enterprise to a particular extent in business activities in the State concerned.

· The paragraph applies equally 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....

· The authority to conclude contracts must cover contracts relating to operations which constitute the business proper of the enterprise.... It would be irrelevant, for instance, if the person had authority to conclude contracts relating to internal operations only...

Dependent agents of Company X in Australia

In the circumstances of Company X, during the income year under consideration, an employee of Company X conducted activities from the employee's residential premises in Australia for a short but continuous period. As stated previously, the employee's essential functions include the collation, analysis and summary of competitive market intelligence to assist with Company X's market strategies.

The employee will also have the authority to make decisions on the day-to-day operation of the market and competitive repository.

The activities of the employee can be categorised into activities of a preparatory character, collection and collation of information pertaining to market intelligence relevant to Company X's business and decision making in respect of product maintenance expenses.

Company X is not deemed to have a PE in Australia in respect of the employee in question pursuant to Article P the Country Y Convention. This is because the employee does not have the authority to bind those operations of Company X which constitute the business proper of the enterprise.

Additionally, the activities carried on by the employee from the employee's residential premises in Australia are largely in the nature of market research and gathering of market intelligence. Such preparatory activities and activities involving collection of information are specifically excluded from the definition of a PE under Article P of the Country Y Convention.

Australian Volunteers

As explained in the OECD Commentary, a dependent agent need not necessarily be an employee of the enterprise as long as that person is engaged, on behalf of the enterprise, in business operations that form the business proper of the enterprise in the State concerned.

Accordingly, the volunteers, by virtue of their continuous involvement in the promotion and development of the activities of Company X, in Australia, can in a sense create a PE of the enterprise in Australia. This is, provided they have and regularly exercise the authority to bind Company X's participation in their activities carried out in Australia.

The judgment in Unisys Corp v. FC of T (2002) 2002 ATC 5146; (2002) 51 ATR 386 (Unisys Corp) cites the following, at paragraph 69, from Arvid A Skaar's Permanent Establishment Erosion of a Tax Treaty Principle, Kluwer, Boston, 1991 at 525:

'the basic rule of the OECD models requires a special connection between the business activity and the place of business. The business activity must be carried out "through'' the place of business. While the dependent agent provision does not explicitly provide for a business connection test, authorisation to perform a business activity on behalf of the principal does not of itself suffice for the constitution of a permanent establishment. The business of the principal has to be actually performed by the agent and, more specifically, the agent must exercise the authority habitually.'

In the instant circumstances, the volunteers that carry out activities in Australia to support Company X's objectives do not have authority to contract debts for, pledge the credit of, or in any way bind Company X with respect to any matter or activity not approved by the Company X Board of Directors. Additionally, there is significant involvement by the representatives of Company X (based in Country Y) in the activities of the volunteers.

The only contracts constituting the business activity of Company X that the volunteers in Australia enter into are contracts with venues for hosting various meetings in relation to carrying out their activities. Even if those contracts bear relevance to Company X's conduct of its business activities in Australia, the concluding of such contracts by the volunteers under authorisation from Company X does not amount to the actual performance of Company X's business in Australia. More specifically, the volunteers do not enter into these contracts with sufficient regularity to satisfy the requirement that an agent must exercise his or her authority to conclude contracts habitually to bind the principal in his or her activities.

Consequently, Company X is not deemed to have a PE in Australia pursuant to Article P of the Country Y Convention.

Finally, Company Y shall not be deemed to have a permanent establishment in Australia under Article P of the Country Y Convention, which also deals with the activities of independent agents. This is due to the fact that the volunteers, who devote their time to support Company X's services in Australia on a part-time basis, are not considered as independent agents that are in the business of providing such services.

Consequently, for the purposes of the Country Y Convention, Company X does not carry on its business in Australia through a permanent establishment in Australia.

Accordingly, the income derived by Company X from the conduct of its activities in Australia is not subject to Australian income tax pursuant to Article P of the Country Y Convention.