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Ruling

Subject: GST and international services

Question

Is the supply of your services to Z Corp GST-free?

Answer

Yes.

Relevant facts

You and Z Corp belong to an international group of companies operating in the business of specialty products.

Z Corp is engaged in the discovery, development and commercialization of specialty products (the Products).

You are engaged in the promotion and distribution of Products in Australia. You are a wholly owned subsidiary of Z Corp and you are registered for GST.

The copy of the Service Agreement (the Agreement) between you (referred to as Contractor) and Z Corp provides the following information:

The Agreement is effective as at 1 January 20XX and remains in force for a period of a number of years.

The territory for which the Agreement applies is Australia (the Territory).

The services that you will render are services related to the import, promotion and distribution of the Products. The precise nature of the services is set out in the Appendix as follows:

You will conduct the review of promotional documents and services related to the products in order to ensure compliance with national requirements.

You must have an emergency plan which ensures effective implementation of any recall from the market. You shall notify immediately Z Corp of any recall, which may be due to manufacture, components or tests.

You shall perform specialised services related to the Products and interactions with the specialty group.

You will act as the sponsor for all the Products in the Territory ensuring compliance with all requirements and interactions regarding the products with the relevant government agencies.

You are paid a Service Fee calculated in accordance with the Appendix of the Agreement.

Z Corp is not incorporated in Australia and does not have its central management or control in Australia. Neither does it have its voting power controlled by shareholders who are residents of Australia. Z Corp is not registered with the Australian Securities & Investments Commission (ASIC) and does not have a permanent establishment in Australia. Z Corp does not carry on its business in Australia at or through a fixed and definite place of its own or through an agent. Z Corp is not registered for GST in Australia.

You do not have the authority to enter into legal relations with other entities in Australia on behalf of Z Corp.

Z Corp, either through its employees, representatives of agents, is not in Australia when you provide your services.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5.

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-190(1).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-190(3).

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Income Tax Assessment Act 1936 Section 6-1.

Reasons for decision

GST is payable on any taxable supply that you make.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the requirements of a taxable supply and it states:

You make a taxable supply if:

· you make the supply for *consideration; and

· the supply is made in the course or furtherance of an *enterprise that you *carry on; and

· the supply is *connected with Australia; and

· you are *registered, or *required to be registered for GST.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

(* denotes a term defined in section 195-1 of the GST Act.)

Under the terms of the Agreement, your supply of services to Z Corp satisfies the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as:

· you receive consideration for the supply of the services

· the supply is made in the course of an enterprise that you carry on

· the supply is connected with Australia as the services are performed in Australia and made through an enterprise that you carry on in Australia, and

· you are registered for GST.

The supply of the services is not input taxed under the GST Act or under any other Act. Therefore, what is left to determine is whether the supply is GST-free.

The supply of services is not considered to be a supply of goods or real property. Hence, the GST status of this supply is appropriately considered under section 38-190 of the GST Act, which provides that certain supplies of things other than goods or real property, for consumption outside Australia, are GST-free. Of relevance, is item 2 in the table in subsection 38-190(1) of the GST Act (item 2).

Item 2 provides that a supply of a thing (other than goods or real property) made to a non-resident is GST-free if it is a supply that is made to a non-resident who is not in Australia when the thing supplied is done, and:

· the supply is neither a supply of work physically performed on goods situated in Australia when the work is done, nor a supply directly connected with *real property situated in Australia; or

· the *non-resident acquires the thing in *carrying on the non-resident's *enterprise, but is not *registered or *required to be registered for GST.

A non-resident for GST purposes is an entity that is not an Australian resident for the purposes of the Income Tax Assessment Act 1936.

A company is a resident of Australia if:

· the company is incorporated in Australia, or

· the company is not incorporated in Australia but has either its central management or control in Australia or its voting power is controlled by shareholders who are residents of Australia.

On the information provided, Z Corp is not a resident of Australia for income tax purposes.

Goods and Services Tax Ruling GSTR 2004/7 provides guidance on when a non-resident is 'not in Australia' for the purposes of item 2.

The requirement that the non-resident in item 2 is not in Australia when the thing supplied is done is a requirement that the non-resident is not in Australia in relation to the supply when the thing supplied is done.

Paragraph 184 of GSTR 2004/7 states:

As the Australian location of the entity to which the supply is made at the relevant time is a proxy test for identifying when consumption occurs in Australia, we consider that the expression 'not in Australia' should be interpreted in the context of the supply in question. The expression 'not in Australia' requires, in our view, that the non-resident or other recipient is not in Australia in relation to the supply. This means that a non-resident or other recipient of a supply may satisfy the 'not in Australia' requirement if that entity is in Australia but not in relation to the supply…

Paragraphs 230 to 332 of GSTR 2004/7 discuss when a non-resident company is in Australia for the purposes of item 2 (and paragraph (b) of item 4).

A company being an artificial legal entity does not have a precise location and its presence can only be established through the presence of its representatives. The representatives of a company may take on a variety of forms and capacity and can include a branch of the company.

The presence of a non-resident company in Australia is the means by which consumption of the supply in Australia is identified.

We determine the presence of a foreign company in a jurisdiction according to jurisdictional law. At common law, a foreign company is amenable to the jurisdiction of an Australian court if the company carries on business within the court's jurisdiction through its own office or through an agent acting on behalf of the company and that office or agent has a fixed and definite place within the jurisdiction and the business has continued for a sufficiently substantial period of time. (paragraph 239 of GSTR 2004/7).

At paragraph 241 of GSTR 2004/7, we established a test where we consider that a non-resident company is in Australia if that company carries on business (or in the case of a company that does not carry on business, carries on its activities) in Australia:

· at or through a fixed and definite place of its own for a sufficiently substantial period of time, or

· through an agent at a fixed and definite place for a sufficiently substantial period of time.

Paragraph 247 of GSTR 2004/7 provides that a non-resident company is in Australia if:

· the company is registered with ASIC, or

· the company has a permanent establishment is Australia for income tax purposes.

A company that is incorporated outside Australia is required to register as a foreign company with ASIC if it wishes to carry on a business in Australia.

You advised that Z Corp is not registered with ASIC.

A non-resident company is considered to be carrying on business in Australia even though the activities carried on in Australia are not a substantial part of, or are no more than incidental to, the main objects of the company.

A non-resident company has a place of its own if it leases or owns a place at which it conducts through its servants or agents. However, a place of its own is not limited to such a place. A non-resident company occupies a place as a place of its own if it has a right to be there. Evidence of that right is generally to be found in the fact that the company's employees or agent occupy that place for the purposes of its business.

If a non-resident company does not have a fixed and definite place in Australia at, or through which, the business of the non-resident company is carried on in Australia, the company is not in Australia.

The word 'fixed' connotes a degree of permanence in the same location. A place may be fixed even if it only exists for a short time. Although 'fixed place' excludes a place that is purely temporary, it does not mean everlasting. It is a geographical place with some degree of permanence. The word 'definite' is used in the sense of a distinct place; that is a place that can be pointed to as the place at which the non-resident company's business is carried on.

For a non-resident company to be considered to be in Australia, the business of the non-resident company must have continued, or be intended to continue, at a fixed and definite place for a sufficiently substantial period of time. Sufficiently substantial period of time simply means that there is a period sufficient for the business of the non-resident company to be conducted in Australia.

If a non-resident company has no fixed or definite place of its own in Australia, it may still carry own business in Australia through an agent from some fixed and definite place. The key issue in this kind of situation is whether the non-resident company is itself carrying on business in Australia through a duly appointed agent, or whether the business being conducted is the agent's own business and the non-resident is merely one of its customers.

Paragraph 281 of GSTR 2004/7 lists factors which may be taken into account in determining whether a non-resident company can properly be regarded as carrying on business in Australia through an agent. Paragraphs 282 to 310 deal with situations where the business of a non-resident company involves the making of contracts for sales, leases or similar. Paragraphs 282 and 283 state:

282. If the business of a non-resident company involves the making of contracts for sales, leases or similar, the authority of the agent to conclude contracts in Australia on behalf of the non-resident is an important factor in establishing whether the non-resident is carrying on business in Australia.

283. If an agent has the power to make contracts on behalf of the non-resident company without seeking the company's approval before binding the non-resident to contractual obligations, this is a factor of great importance in establishing that the agent is carrying on the non-resident company's business. While it is not the sole determinative factor, when coupled with other factors such as the agent displaying the name of the non-resident company on the agent's premises, or the non-resident company reimbursing the rent and staff costs of the agent, there will be little difficulty in establishing that the agent is carrying on in Australia the business of the non-resident. In these circumstances, the non-resident company has, in effect, adopted the agent's place of business as its own, and the non-resident company is in Australia.

On the information provided, Z Corp does not directly lease or otherwise occupy premises in Australia. Their only presence is through you, their subsidiary.

As outlined in paragraph 319 of GSTR 2004/7, the mere presence of a subsidiary does not mean that a non-resident company is carrying on a business in Australia.

The fact that you are a subsidiary of Z Corp does not make them present in Australia unless you are acting as their agent and carrying on their business in Australia at some fixed place of business for a sufficiently substantial period of time.

As outlined in the Agreement, Z Corp has contracted you to perform certain services in Australia. Although you act as an intermediary for Z Corp in its dealings with the relevant government agencies, you do not have power to contract nor have the authority to enter into legal relations with other entities in Australia on their behalf.

Based on the information provided, we do not consider that Z Corp is carrying on its business in Australia through you as their agent.

Hence, we consider that Z Corp is not in Australia in relation to your supply of services when such supply is made.

The supply of your services must also satisfy the requirements of either paragraph (a) or paragraph (b) of item 2 for the supply to be GST-free.

Paragraph (a) and/or (b) of Item 2

Goods an Services Tax Ruling GSTR 2003/7 examines the meaning of the expressions 'directly connected with goods or real property' and 'a supply of work physically performed on goods' as used in subsection 38-190(1) of the GST Act.

Paragraph 21 of GSTR 2003/7 states:

21. Under items 1, 2 and 3 it is only where the connection between the supply and the goods or real property is a direct one that the location of goods or real property is regarded as the place where consumption occurs. The addition of the adverb 'directly' to the phrase 'connected with' implies a more emphatic connection between the supply and goods or real property. The inference is that the supply is so closely aligned with goods or real property that it is appropriate to treat the location of the goods or real property as the place where consumption occurs.

Paragraph 23 of GSTR 2003/7 provides that the goods or real property must be particular goods or real property for this very close connection to exist. A supply that is connected with goods or real property in general, rather than with particular goods or real property, does not have a sufficiently close connection with goods or real property for that connection to be a direct one.

Paragraph 33 of GSTR 2003/7 provides examples of situations where the Commissioner considers that a close link or association between the supply and particular goods or real property exists. An example given is where the direct object of the supply is the goods or real property in the sense that the supply changes or affects the goods or real property in a physical way. Examples of supplies that fall in this category are listed in paragraphs 37 and 38 of GSTR 2003/7. A common example of a supply of this kind is a supply of a service that is physically performed on particular goods or real property such as the repair of goods or building. Other examples of supplies of this kind include the installation, alteration, repair, cleaning, restoration or modification of goods.

Paragraphs 58 and 59 of GSTR 2003/7 provide the following examples:

58. A supply is a supply of work physically performed on goods where something is done deliberately to the goods to change them or to otherwise affect them in some physical way. The repair of goods is an example of work that is physically performed on goods.

59. In contrast, where activities do not change or affect goods in a physical way, there is no supply of work physically performed on goods. For example, a supply of transporting goods is not work physically performed on goods because the supply only changes the location of the goods, not the goods themselves.

The services that you carry out in Australia for Z Corp are neither a supply of work physically performed on goods situated in Australia when the work is done, nor a supply directly connected with real property situated in Australia. As such, the supply of your services satisfies the requirements of paragraph (a) of item 2.

As the requirements of paragraph (a) of item 2 are satisfied, there is no need to consider if the requirements of paragraph (b) of item 2 are met.

However, item 2 is limited by subsection 38-190(3) of the GST Act.

Limitations of item 2

If the supply covered by item 2 is under an agreement entered into, whether directly or indirectly, with a non-resident entity and that supply is provided to another entity in Australia, or the agreement requires that it be so provided, subsection 38-190(3) of the GST Act negates the GST-free status of that supply.

Subsection 38-190(3) of the GST Act states:

Without limiting subsection 38-190(2) or (2A), a supply covered by item 2 is not GST-free if:

· it is a supply under an agreement entered into, whether directly or indirectly with a *non-resident; and

· the supply is provided or the agreement requires it to be provided, to another entity in Australia.

In this case, the supply of your services is a supply under an agreement entered into with a non-resident entity. Hence, paragraph 38-190(3)(a) is satisfied.

GSTR 2005/6 which provides the Tax Office view on the operation of subsection

38-190(3) of the GST Act states at paragraphs 59 and 61:

59. The word 'provided' is used in subsection 38-190(3) to contrast with the term 'made' in item 2. In the context of section 38-190, the contrasting words indicate that if a non-resident contracts for a supply to be provided to another entity, the place of consumption should be determined with regard to the entity to which the supply is provided, not the entity to which the supply is made.

61. Thus the expression 'provided to another entity' means, in our view, that in the performance of a service (or in the doing of some thing), the actual flow of that supply is, in whole or part, to an entity that is not the non-resident entity with which the supplier made the agreement for the supply. The contractual flow is to one entity (the non-resident recipient) and the actual flow of the supply is to another entity.

The Agreement provides that you are required to supply your services to Z Corp and there is nothing to indicate that you are required to provide the services to other entities in Australia. Hence, the contractual and actual flow of the services is to Z Corp. Hence, paragraph 38-190(3)(b) is not satisfied.

Therefore, subsection 38-190(3) of the GST Act does not exclude your services from being GST-free under item 2 as the supply of your services is made and provided to Z Corp, a non-resident company not in Australia when the supply is made.

Accordingly, the supply of your services to Z Corp is GST-free under Item 2. Hence, GST is not payable on this supply.