Edited version of private ruling

Authorisation Number: 1011833275887

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Ruling

Subject: Permanent establishment

Question 1

Is the income derived by a company from the sale of their products in Australia assessable in Australia?

Answer

No

Question 2

If not, is the company required to lodge a tax return in Australia?

Answer:

No

This ruling applies for the following period

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on

1 July 2009

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.

The company is a resident of Country X (X) and is not a resident of Australia for income tax purposes.

The company is a X incorporated company whose business activity is the importation and distribution of giftware imported from various countries.

The company's principal activity is X based and involves selling the imported giftware to a range of X based retailers.

The company has recently started importing from various countries giftware directly into Australia and they sell that imported giftware to Australian retailers via an independent Australian commission agent. The commission agent represents a number of products lines and the company's products represent a relatively minor part of the commission agents business.

The company receives orders from their Australian independent commission agent and from Australian retailers directly. These orders are received and processed by the company in X and the company issue an invoice for the goods to the retailers directly.

A commission is paid by the company to the independent commission agent once the company has received payment for the goods from the Australian retailers.

The company also engages the services of an Australian warehousing business which warehouses the imported goods for the company. The Australian warehousing business acts for a range of clients including the company.

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

The company's office and administrative functions are in X and the company does not employ personnel in Australia.

Payment from the retailers is received by the company into an Australian dollar bank account with an Australian bank and via credit card payment into Country X located bank account before the goods are released to the Australian retailers.

The company has been importing and selling giftware into Australia since April 2008.

Relevant legislative provisions

Subsection 6-5(3) of the Income Tax Assessment Act 1997
Subsection 161(1) of the Income Tax Assessment Act 1936
Schedule 4 of the International Tax Agreements Act 1953

Country X Agreement

Article 7 of the X Agreement

Article 5(1) of the X Agreement

Article 5(6) of the X Agreement

Article 5(7) of the X Agreement

Article 5(8) of the X Agreement

Country X Convention

Article 7 of the X Convention

Article 5(1) of the X Convention

Article 5(4) of the X Convention

Article 5(7) of the X Convention

Article 5(8) of the X Convention

Article 5(9) of the X Convention

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 non-resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year.

The income derived from sales of goods is ordinary income for the purposes of subsections 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 (the OECD Model Commentary).

For income year 2009-10

Schedule 4 of the Agreements Act contains the tax treaty between Australia and Country X (the X Agreement). The X Agreement operates to avoid the double taxation of income received by Australian and X residents.

Under Article 7 of the X Agreement, the business profits of an company of X shall be only taxable in 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 enterprises profit attributable to the PE in Australia may be taxed in Australia.

PE is defined in Article 5(1) of the 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.

Paragraph 4 of the OECD Model Commentary on Article 5(1) explains that the term place of business generally covers any premises, facilities or installations used for carrying on the business of an enterprise whether or not they are used exclusively for that purpose so long as a certain amount of space is at its disposal.

In this case, the company does not have an office, a factory or a workshop in Australia. Therefore, the company does not have a fixed place of business in Australia under Article 5(1) of the X Agreement.

Article 5(6) of the X Agreement provides that an enterprise shall not be deemed to have a PE merely by reason of the use of the facilities or the maintenance of a stock of goods belonging to the enterprise solely for the purposes of storage, display or delivery. The maintenance of a stock of goods solely for processing and the maintenance of a fixed place of business solely to carry on the activity of a preparatory or auxiliary character will also not constitute a PE of the enterprise.

As the imported giftware is not manufactured in Australia and the company engage the services of an Australia warehousing business which warehouses the imported goods for the company. This does not constitute a PE of the company under Article 5(6) of the X Agreement.

Article 5(7) of the X Agreement provides that a PE will be deemed to exist if a X 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 or who manufactures or processes in Australia goods or merchandise belonging to the enterprise.

As the company has stated that there was no person acting on behalf of the company in Australia who was not an agent of independent status, Article 5(7) of the X Agreement would not apply to deem a PE to exist in Australia.

Article 5(8) of the X Agreement provides a X enterprise shall not be deemed to have a PE in Australia merely because it carries on business in Australia through a person who is a broker, general commission agent or any other agent of an independent status and acting in the ordinary course of the persons business as a broker or agent.

Paragraph 37 of the OECD Model Commentary provides that the agent will not constitute a PE of the enterprise on whose behalf he acts only if:

· the agent is independent of the enterprise both legally and economically , and

· the agent acts in the course of his business when acting on behalf of the enterprise.

Furthermore, paragraphs 38.6 and 38.7 of the OECD Model commentary provide that independent agent status is less likely if the activities of the agent are performed wholly or almost wholly on behalf of only one enterprise or where the commission agent not only sells the goods or merchandise of the enterprise, but as a permanent agent having authority to conclude contracts, he would be deemed in respect of this activity to be a PE.

In this case, the company has stated that all its activities conducted in Australia were conducted through an independent agent in the ordinary course of their business who were paid on a commission or per contract. There were no parties or agents acting exclusively for the company. Therefore, Article 5(8) of the X Agreement shall not deem the company to have a PE in Australia.

Based on the information provided, the company is not deemed to have a PE in Australia for the 2009-10 income year. Consequently, the business profit of the company shall not be taxable in Australia under Article 7 of the X Agreement.

Accordingly, the income derived by the company from sales made in Australia is not assessable, under subsection 6-5(3) of the ITAA 1997 by virtue of the overriding effect of Article 7 of the X Agreement.

For income years 2010-11 to 2013-2014

A new tax treaty has been signed by Australia and Country X on 26 June 2009, the 2009 Country X Convention. The agreement has effect in respect of other Australian taxes in relation to income, profits or gains of the year beginning 1 July 2010 and later years.

Under Article 7 of the X Convention, the business profits of an enterprise of X shall be only taxable in 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 enterprises profit attributable to the PE in Australia may be taxed in Australia.

PE is defined in Article 5(1) of the X Convention 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.

Article 5(4) of the X Convention provides that an enterprise shall be deemed to have a permanent establishment in Australia where an enterprise of X:

· performs services in Australia

· through an individual who is present in Australia for a period or periods exceeding in the aggregate 183 days in any twelve month period, and more than 50 per cent of the gross revenues attributable to active business activities of the enterprise during the period or periods are derived from the services performed in Australia through that individual, or

· for a period or periods exceeding in the aggregate 183 days in any twelve month period, and these services are performed for the same project or for connected projects through one or more individuals who are present and performing such services in Australia.

Such activities shall be deemed to be carried on through a permanent establishment of the enterprise situated in Australia, unless the activities are limited to those mentioned in paragraph 7 which, if exercised through a fixed place of business, would not make this place of business a permanent establishment under the provisions of that paragraph.

Article 5(7) of the X Convention provides that notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include:

· the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;

· the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;

· the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

· the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise;

· the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character;

· the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs a) to e) of this paragraph,

· provided that such activities are, in relation to the enterprise, of a preparatory or auxiliary character.

Article 5(8) of the X Convention further states notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 9 applies - is acting on behalf of an enterprise and:

· has, and habitually exercises, in a Contracting State an authority to substantially negotiate or conclude contracts on behalf of the enterprise; or

· manufactures or processes in a Contracting State for the enterprise goods or merchandise belonging to the enterprise,

that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 7 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.

Article 5(9) of the X Convention also provides that an enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a person who is a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business as such a broker or agent.

In applying the abovementioned changes to the facts of this case, the company is still not deemed to have a PE in Australia for the 2010-11 to 2013-14 income years. Consequently, the business profit of the company shall not be taxable in Australia under Article 7 of the X Convention.

Accordingly, the income derived by the company from sales made in Australia is not assessable, under subsection 6-5(3) of the ITAA 1997 by virtue of the overriding effect of Article 7 of the X Convention.

Lodgement requirement

Subsection 161(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that every person if required to do so by the Commissioner must furnish an annual return within the time specified in the notice (legislative instrument) published by the Commissioner.

The legislative instrument sets out the obligations of certain taxpayers to lodge returns and the date by which they must be lodged. It also identifies classes of taxpayers who are not required to lodge a return.

Based on the legislative instrument for the lodgement of returns for the 2006-07 income year, a foreign resident company that does not derive income that is taxable in Australia, apart from dividend, interest or royalty income from Australian sources subject to withholding tax in Australia is not required to lodge a return in Australia.

Therefore, since the income derived by the company is not taxable in Australia it is not required to lodge a tax return in Australia for the 2009-10 to 2013-14 income years.