Edited version of your private ruling

Authorisation Number: 1012469199560

Ruling

Subject: GST and International services

Question

Is the supply of your procurement agent services under your contract with the Entity X GST-free under subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answers

Yes.

Facts

You will act as a procurement agent for and on behalf of Entity X. You will not be taking title to any goods, work or services.

You provided a copy of Appendix A of your agreement with Entity X. It contains the following clauses:

You are required to provide various departments of Entity X with a full procurement service that shall include the procurement of all goods, works, supply services, and professional and intellectual services.

You will take over the management of Entity X's Warehouse. You shall maintain a presence in Country X throughout the duration of the contract.

Entity X considers that the payment of GST in Australia is a major problem, as Entity X cannot be registered for receiving GST refunds.

The Resident Manager (RM) shall be responsible for all aspects of the running of the Warehouse and for supervising and managing its personnel.

You shall receive and process procurement requests from the various departments of Entity X, making payments to suppliers, contractors and service providers, and consultants as these amounts fall due.

You shall submit a monthly financial report to Entity X's Finance Department, copied to concerned department, and shall request additional top-up funds on the basis of payments made.

You shall open an imprest account for Entity X and one each for the various departments.

At contract mobilisation, the Finance Department shall provide you with a list of authorised signatories who may sign indents or issue instructions of any nature to you. This shall be updated as changes occur.

Indicative areas of procurement are as follows:

Goods

Works

Supply Services

Professional and Intellectual Services

You are required to procure on behalf of various departments on the best possible terms, taking into account not just price, but quality, delivery time, etc.

If you should operate from a base in Australia, which is anticipated, under no circumstances are you permitted to charge Australian GST on either its own services or the supplies that it procures for Entity X. If you should incur GST on supplies that you procure, you should have a mechanism to recover this yourself. GST cannot be passed on to Entity X. There may be a need for you to clarify with the relevant authority in Australia whether you are allowed to issue suppliers with a tax exemption certificate, should the need arise.

Irrespective of where you operate from, you shall not be permitted to charge Entity X any taxes similar in nature to Australian GST.

You will carry out all your duties ensuring that, at all times, you hold paramount the interest of Entity X and its various departments. You, thus, will ensure all procurement is undertaken on behalf of the Entity X and its departments on the best terms obtainable by you.

The full operation of the new procurement system, including the use of your services, shall begin on Month 20XX.

For the purposes of the contract with Entity X, you will operate from an office in an Australian capital city. Subject to successful visa applications, you will post a senior procurement specialist from Country Y to Australia and will engage a number of Australian professional, administrative and support staff.

The contract between you and Entity X does not require you to provide procurement agency services to another entity in Australia.

Entity X currently has a procurement office in a capital city in Australia. You are advised that once you commence providing your services, the Entity X procurement office will close and the routing of procurement requests will be direct from Country X straight to your office.

You registered with the Australian Securities and Investments Commission as a foreign company. You will obtain a TFN from the Australian Taxation Office and register for GST and PAYG.

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 Section 9-40.

A New Tax System (Goods and Services Tax) Act 1999 Section 57-5

A New Tax System (Goods and Services Tax) Act 1999 Section 57-10.

A New Tax System (Goods and Services Tax) Act 1999 Section 57-20.

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).

Summary

The supply of your procurement agency services under your contract with Entity X is GST-free under subsection 38-190(1) of the GST Act.

Detailed reasoning

Under the Australian GST system, there are no tax exempt entities. It is the type of supply that determines whether GST is payable. Hence, where a supplier is making a taxable supply, GST will be included in the price of that supply.

Taxable supply

Section 9-40 of the GST Act provides that you must pay the GST payable on any taxable supply that you make.

You make a taxable supply if the supply meets all of the requirements of section 9-5 of the GST Act. Section 9-5 of the GST Act states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

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

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

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)

Your agreement with Entity X which commences on Month 20XX provides that you will be paid an annual fee for your procurement agent services. You have also advised that you will register for GST.

Hence, your supply of procurement agency services to Entity X meets the requirements paragraphs 9-5(a), 9-5(b) and 9-5(d) of the GST Act as:

· you supply your procurement agency services for consideration

· you supply the procurement agency services in the course or furtherance of an enterprise that you carry on

· you advised that you will be registered for GST.

As you are providing your services to an entity outside Australia, we need to determine if you are making supplies that are connected with Australia.

Subsection 9-25(5) of the GST Act provides that a supply of anything other than goods or real property is connected with Australia if, among others:

· the thing is done in Australia or

· the supplier makes the supply through an enterprise that the supplier carries on in Australia.

Goods and Services Tax Ruling GSTR 2000/31 explains when a supply is connected with Australia.

Paragraph 65 of GSTR 2000/31 provides that if the thing being supplied is a service, the supply of that service is typically done where the service is performed. If the service is performed in Australia, the service is done in Australia and the supply of that service is connected with Australia. This is the case even if the recipient of the supply is outside Australia.

From the information provided, your procurement services are done in Australia. Hence, the supply of these services is connected with Australia under paragraph 9-25(5)(a) of the GST Act.

However, some of your services, such as the operation of Entity X's warehouse, are done in Country X. The supply of these services is not connected with Australia under paragraph 9-25(5)(a) of the GST Act. Nonetheless, the supply is connected with Australia under paragraph 9-25(5)(b) of the GST Act if the supply is made through the enterprise that you carry on in Australia.

The concept of carrying on an enterprise in Australia is defined in terms of the definition of 'permanent establishment' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

Specifically under paragraph 9-25(6)(a) of the GST Act the supplier carries on an enterprise in Australia if the enterprise is carried on through a permanent establishment.

However, for a supply to be connected with Australia under paragraph 9-25(5)(b), a connection must be established between the Australian permanent establishment and the supply.

A permanent establishment is widely defined in subsection 6(1) of the ITAA 1936. Generally, it can be described as a place through, or at which, an entity conducts its business in Australia.

You have advised that for the purposes of the contract with Entity X, you will operate from an office in an Australian capital city which will be staffed by a senior procurement specialist from Country Y and a number of Australian professional, administrative and support staff.

Hence, there is a connection between your Australian permanent establishment and the supply of your services to Entity X.

As you are making the supply through the enterprise that you carry on in Australia, the supply of your services which are done in Country X is connected with Australia under paragraph 9-25(5)(b) of the GST Act.

Therefore, as you are making supplies that are connected with Australia, paragraph 9-5(c) of the GST Act is satisfied.

The supply of your procurement agency services is not input taxed under any provision of the GST Act or any other Act. It remains to be determined if the supply is GST-free.

GST-free

Paragraph 9-30(1)(a) of the GST Act provides that a supply is GST-free if it is GST-free under Division 38 of the GST Act or under a provision of another Act.

Section 38-190 of the GST Act provides that certain supplies of things other than goods or real property, for consumption outside of Australia are GST-free. As the supply of your procurement agency services to Entity X is neither a supply of goods nor a supply of real property, section 38-190 of the GST Act is relevant for consideration.

Item 2 in the table in subsection 38-190(1) of the GST Act (item 2) provides that a supply of a thing, other than goods or real property, made to a non-resident is GST-free if the non-resident 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.

Non-resident

Section 195-1 of the GST Act provides that for GST purposes 'non-resident' means an entity that is not an Australian resident and 'Australian resident' means a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936).

Accordingly, a supply that is made to an entity is a supply to a non-resident for GST purposes if the entity is not a resident of Australia for income tax purposes.

Subsection 6(1) of ITAA 1936 provides that a company is a resident of Australia for income tax purposes if:

the company is incorporated in Australia, or

if not incorporated in Australia, it carries on business in Australia and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

A company is defined in section 195-1 of the GST Act as:

· a body corporate or

· any other unincorporated association or body of persons

· but does not include a partnership or a non-entity joint venture.

On the information provided, Entity X is a foreign company and is not incorporated in Australia. Furthermore, is not a resident of Australia for income tax purposes. Therefore, Entity X is a non-resident for GST purposes.

Not in Australia

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.

At paragraph 37 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.

· Further, a non-resident company is in Australia in relation to the supply if:

· the supply is solely or partly for the purposes of the Australian presence, or

· the presence of the company is involved in the supply, unless the only involvement is minor.

On the information provided, Entity X does not have any business of its own in Australia. Your agreement also provides that Entity X cannot be registered for GST in Australia.

The scope of your services as outlined in the agreement does not indicate that Entity X is carrying on any business in Australia through you as its agent.

Entity X, either through its employees, representatives or agents, is not in Australia when you provide your procurement agent services. Further, all communications in relation to your supply are made directly with Entity X in its offices in Country X.

Based on the information provided, we consider that Entity X is not in Australia in relation to your supply of procurement agent services when such supplies are made for the purposes of item 2.

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

Paragraphs (a) and/or (b) of item 2

For the purposes of paragraph (a) of item 2, the supply must be analysed to determine whether it is properly characterised as a supply of work physically performed on goods or is directly connected with real property situated in Australia.

Goods and 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.

From the information that you have provided, the nature of your supply to Entity X is the provision of services. The supply of your procurement agent services is neither a supply of work physically performed on goods situated in Australia nor a supply directly connected with real property situated in Australia. Therefore, the supply of your procurement agent services to Entity X is a supply covered under 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, the scope of item 2 is limited by subsection 38-190(3) of the GST Act.

Subsection 38-190(3)

Subsection 38-190(3) of the GST Act states that a supply covered by item 2 is not GST-free if:

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

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

Goods and Services Tax Ruling GSTR 2005/6 explains the operation of subsection 38-190(3) of the GST Act. This ruling provides that subsection 38-190(3) of the GST Act only applies if there is a supply of something, being a supply that is made to a non-resident and is covered by item 2, and that same supply is provided, or is required to be provided to another entity in Australia. That is the contractual flow of the supply is to one entity (the non-resident) and the actual flow of the supply is to another entity in Australia.

The intent of this provision is to impose a further location test when a supply is provided, or required to be provided, to another entity. If that other entity is in Australia, subsection 38-190(3) of the GST Act operates to negate the GST-free status that would otherwise apply under item 2.

In your case, paragraph 38-190(3)(a) of the GST Act is satisfied as the supply of your procurement agent services is under an agreement entered into with a non-resident.

In order to determine whether the requirement of paragraph 38-190(3)(b) of the GST Act is met, it must be established to which entity the supply is 'provided'.

On the information provided, you do not provide and your agreement with Entity X does not require you to provide your procurement agent services to another entity in Australia. You are providing and the agreement requires you to provide your services to Entity X.

Accordingly, the actual flow of the supply is also to Entity X. Hence, paragraph 38-190(3)(b) of the GST Act is not satisfied. As such, subsection 38-190(3) of the GST Act does not exclude the supply of your procurement agent services to Entity X from being GST-free under item 2. Therefore, the supply of your procurement agent services to Entity X is GST-free under item 2.

Additional information - Acquisitions as an agent

You are entitled to an input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

you acquire anything solely or partly for a creditable purpose; and

the supply of the thing made to you is a taxable supply; and

(c ) you provide, or are liable to provide, consideration for the supply; and

you are registered or required to be registered.

Generally you make an acquisition for a creditable purpose if you acquire it in carrying on your enterprise.

Your agreement with Entity X requires you to provide Entity X's various departments in Country X with a full procurement service that includes the procurement of all goods, works, supply services, and professional and intellectual services. You are required to procure on behalf of these departments on the best possible terms. You will receive and process procurement requests from the various departments, making payments to suppliers, contractors and service providers, and consultants as they fall due. You advised that you will not be taking title to any goods, work or services.

On the information provided you are not acquiring these things for your enterprise. Hence, the requirement that the thing acquired is for a creditable purpose is not met and you are not entitled to an input tax credit under the general rule.

Your agreement with Entity X outlines the services that you are required to perform and specifies that you are engaged to perform these services as an agent of Entity X.

Agency relationships are discussed in Goods and Services Tax Ruling GSTR 2000/37.

Paragraph 10 of GSTR 2000/37 states:

An intermediary may be authorised by another party to do something on that party's behalf. Generally, the intermediary is called an agent. The party who authorises the agent to act on their behalf is called the principal…

Paragraph 15 of GSTR 2000/37 goes on to state:

When an agent uses his or her authority to act for a principal, then any act done on behalf of that principal is an act of the principal.

Division 57 of the GST Act applies to resident agents acting for non-resident principals. When the principal is a non-resident, Division 57 of the GST Act effectively makes their resident agent responsible for the GST consequences of what the non-resident principals do through their resident agents.

From the information provided, you are acting as agent for Entity X when you organise the purchase of things on behalf of Entity X. You have the authority to act on behalf of Entity X, the principal, in respect of these matters.

Subsection 57-10(1) of the GST Act provides that, when a non-resident makes a creditable acquisition through a resident agent, the resident agent is entitled to the input tax credit.

Section 57-20 of the GST Act provides that a resident agent who is acting as agent for a non-resident is required to be registered for GST if the non-resident is registered or required to be registered for GST.

On the information provided, Entity X does not have any business of its own in Australia, is not a resident of Australia for income tax purposes and cannot be registered for GST in Australia.

Although you will be registering for GST in your own right, Entity X is neither registered nor required to be registered for GST in Australia.

Therefore, Division 57 will not apply to any acquisitions you make on behalf of Entity X.

You should note that the GST implications of supplies by Australian-based entities to Entity X and Entity X's acquisitions from Australian-based entities cannot be addressed in a ruling to you.

We provide the following general information that maybe helpful to you when dealing with Australian-based entities on behalf of Entity X.

Supply of goods

A supply of goods that are subsequently exported from Australia is GST-free if the requirements of one of the items in the table in subsection 38-185(1) of the GST Act are met.

Item 1 in the table in that subsection (item 1) provides that a supply of goods is GST-free if the supplier exports them from Australia within 60 days (or such further period as the Commissioner allows) after:

· the day on which the supplier receives any of the consideration for the supply, or

· if, on an earlier day, the supplier gives an invoice for the supply - the day on which the supplier gives the invoice.

For the supply of goods to be GST-free under item 1, the supplier must export the goods before, or within a 60 day period (or such further period as the Commissioner allows). The law requires the goods to be actually exported before or within the time period.

Subsection 38-185(3) of the GST Act operates to treat the supplier in certain circumstances as having exported the goods when in fact the recipient exports the goods. Where the subsection applies the supply of goods may be GST-free under item 1.

Goods and Services Tax Ruling GSTR 2002/6 explains the requirements for supplies of goods to be GST-free exports.

Supply of services

Under item 3 in the table in subsection 38-190(1) of the GST Act (item 3), a supply of a thing (other than goods or real property) is GST-free if:

· the recipient entity is not in Australia when the thing supplied is done; and

· the effective use or enjoyment of the supply takes place outside Australia; and

· the supply is neither work physically performed on goods situated in Australia when the work is done nor a supply directly connected with real property situated in Australia.

· Item 3 requires that the recipient is not in Australia when the thing supplied is done. A recipient, in relation to a supply, is the entity to which the supply was made. It is not a requirement of item 3 that the recipient is a non-resident.

If a supply is made to a recipient who fails the not in Australia requirement in paragraph (a) of item 3, it is necessary to consider whether subsection 38-190(4) of the GST Act applies.

Subsection 38-190(4) extends the scope of item 3. The subsection provides that a supply is taken for the purposes of item 3, to be a supply made to a recipient who is not in Australia if:

· it is a supply under an agreement entered into, whether directly or indirectly, with an Australian resident and

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

Accordingly, if the supply is made under an agreement with an Australian resident recipient but the thing supplied is provided, or the agreement requires it to be provided to another entity located outside Australia, subsection 38-190(4) applies and the 'not in Australia' requirement in item 3 is satisfied.

Goods and Services Tax Rulings GSTR 2004/7 and GSTR 2007/2 provide guidance on the application of item 3.

If the Australian-based entities or Entity X want to be certain about how the GST law applies to their particular circumstances, they can apply for a private ruling.

All GST rulings referred to above are available at the ATO website www.ato.gov.au