Edited version of your private ruling

Authorisation Number: 1012590820198

Ruling

Subject: Residency

Question 1

Do you have a permanent establishment in Australia for the purposes of an Article of the Agreement between the Government of the Commonwealth of Australia and an overseas country for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income?

Answer

No.

This ruling applies for the following periods

30 June 2013,

30 June 2014,

30 June 2015,

30 June 2016,

30 June 2017,

30 June 2018.

The scheme commences on

1 July 2012.

Relevant facts and circumstances

Background

You are a company incorporated under the laws of an overseas country with its principal office overseas and a resident under an overseas convention.

You are part of the global group.

It is a multi-channel specialty retailer of products to 2 segments:

· Retail to Customer ("RTC") - Products are sold through retail stores.

· Direct-to-Customer (DTC) - Products are sold online.

The company and the Australian Market

You are responsible for all in-bound logistics and warehousing of inventory for the Australian branch of the global group for both the RTC and DTC business segments.

The role of each entity is described in further detail below.

Your role

You were incorporated overseas before 20XX and are a tax resident of overseas under the overseas convention. You employ people and are responsible for a wide variety of functions including, but not limited to:

· the development and implementation of retail marketing strategy,

· retail advertising,

· store design and merchandise presentation,

· customer service and staff training,

· inbound logistics and warehousing,

· maintenance of website and servers,

· production of DTC catalogues,

· trademarks and trade names, and

· transfer of title for merchandise and after sales support.

You also manage the online internet platform used to facilitate DTC sales. You bear the risk associated with the performance of such functions including, but not limited to;

· market risk,

· inventory risk,

· and warranty and product liability risk.

You customise the marketing and advertising of products and services for the uniquely different markets and cultures to showcase its investment in and commitment to local communities and cultures. Accordingly, you have invested considerably in your marketing, PR, and policy efforts to assist the Australian branch in establishing itself in the Australian market.

Presence in Australia

In-bound logistics and storage of merchandise

You are responsible for all in-bound logistics and warehousing of products sold in Australia. To perform this function, you have leased a warehouse in Australia to solely import and store products.

The importation and in-bound logistics has been outsourced to unrelated third parties. The operation of the warehouse has been outsourced to an unrelated third party who is responsible for all services at the warehouse including receipt of the imported goods.

No manufacturing activities occur in the warehouse and it is not used as a retail store. None of your employees are engaged at the warehouse and all equipment is owned by the unrelated third party.

Title to the Merchandise

Sales orders received via the internet (i.e. DTC sales) are sent to your warehouse for fulfilment. At this time, the title to the merchandise passes from you to Australian branch at the point of dispatch from the warehouse where the responsibility for delivery of the merchandise to the customer is with the Australian branch.

For retail sales orders, title to the merchandise transfers from you to the Australian branch immediately prior to leaving the warehouse where the responsibility for delivery of the merchandise to the retail stores is also with the Australian branch.

Title to the merchandise passes from you to the Australian branch to avoid bank and foreign exchange charges being imposed on Australian customers if you were to sell the inventory directly to the customer.

For completeness, we note that you do not have any employees or representatives in Australia and do not execute any contracts in Australia. You do not have any employees permanently located in Australia and there is no regular program of visits to Australia by your employees. To the extent that there have been visits by your employees, such visits are typically limited to less than 7 days and the activities of the individuals would be limited to the following:

· Visiting the retail stores,

· Attendance at regional conferences and training,

· Review of local procedures and protocols,

· Participation in team-building events and meetings, and

· Meetings to evaluate customer satisfaction with service offerings and service delivery.

The Role of the Australian branch

The Australian branch was incorporated in Australia before 20XX and is a wholly owned subsidiary of an international company which is ultimately owned by the same international company as you. The Australian branch is an Australian company for taxation purposes.

The Australian branch is responsible for all retail sales in Australia through its stores and performs limited functions for the DTC business.

Retail Operations

The Australian branch officially commenced retail operations in Australia before 20XX with the opening of stores, at leased premises.

The Australian branch currently has several employees involved in operating the retail stores and performing general and administrative functions.

All merchandise showcased and sold to customers by the Australian branch in its retail stores have been procured from your warehouse. The Australian branch is responsible for delivery of the merchandise to the retail stores or directly to the customer (if the merchandise is not available in store).

Direct-To-Customer Operations

As at 20YY, the Australian branch also sold direct to the customer via the Internet. Australian customers contract with the Australian branch via an online internet platform for the processing of their order. However, the major functions of the DTC business, such as the fulfilment of sales orders, inbound logistics and storage of merchandise are managed by you.

The sales orders are processed via the online sales platform and are sent to the warehouse for fulfilment. Title to the goods then passes to the Australian branch once the merchandise is ready for dispatch from the warehouse. As stated, this is to avoid bank and foreign exchange charges being imposed on Australian customers. The Australian branch is then responsible for delivery of the goods from the warehouse direct to the customer.

The Distribution Agreement

The DTC and retail store operations of the Australian branch are provided pursuant to the Distribution Agreement of 20YY (the "Distribution Agreement"), a copy of the distribution Agreement is included at Appendix 2.

The services provided by the Australian branch for you under the Distribution Agreement broadly include the following:

· Maintaining the retail stores;

· Promoting the sale of merchandise;

· Providing services for existing and potential customer accounts;

· Assuming all risk relating to order processing errors, mistakes in the communication of product specifications to customers, customer credit and customer liability (but not product liability);

· Furnishing to you, market information that may reasonably be required from time to time;

· Immediately notifying you of any:

o Claim for damages for breach of warranty in respect of the merchandise,

o Claim that the sale of merchandise or use at brands infringes any trademark, copyright, trade secret, patent or similar right of another person; and

o Infringement of any trademark, trade secret, patent or similar right of yours.

· Accepting title and risk of loss from you at the moment of domestic supply and accepting the cost of transportation of the merchandise from the warehouse to the retail stores and/or customer.

The Australian branch does not have the authority to conclude contracts for or on your behalf and does not have the authority to purchase merchandise for you. Further, the Australian branch does not have the authority to secure or fill orders on your behalf. Rather, the Australian branch secures and fills orders for both the RTC and DTC businesses on its own behalf. In this regard, the Australian branch does not act as a dependent agent on your behalf.

Ownership of Intellectual Property

All intellectual property of the group is legally owned and developed by parent and you. The Australian branch does not own any marketing or other intellectual property.

Relevant legislative provisions

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Section 5

Income Tax Assessment Act 1936

Income Tax Assessment Act 1997

Reasons for decision

Question 1

Summary

You do not have Permanent Establishment in Australia as per the Overseas Agreement because of your warehousing activities.

Detailed reasoning

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997) so that all three Acts are read as one.

The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The overseas agreement is listed in section 5 of the Agreements Act.

The agreement between Australia and the Overseas Country operates to avoid the double taxation of income received by residents of Australia and the Overseas Country. Article X of the Overseas Country Agreement defines the term Permanent Establishment (PE).

Article X(1) of the Overseas Country Agreement contains the general definition of a PE which is as follows:

"For the purposes of this Agreement the term "permanent establishment" in relation to an enterprise means a fixed place of trade or business in which the trade or business of the enterprise is wholly or partly carried on."

Taxation Ruling TR 2001/13 at paragraphs 101 to 105 explains the Commissioner's view that the OECD Model Tax Convention and Commentaries are relevant to interpreting Australia's tax treaties. Paragraph 1 of the OECD Commentary on Article 4 of the OECD Model Tax Convention explains that the general definition of a PE contains the following conditions:

1. the existence of a 'place of business', i.e. a facility such as premises or in certain instances, machinery or equipment;

2. this place of business must be 'fixed', i.e. must be established at a distinct place with a certain degree of permanence;

3. 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 Commentaries explain that a 'place of business' covers any premises, facilities or installations used for carrying on the business. It is also immaterial if a business is actually carried on in the premises and whether the premises is owned or rented. The important consideration is that the space must be at the disposal of the entity.

In your case, you are part of a multi-channel retailer of products. You are an Overseas Country based company and your responsibilities are the development and implementation of:

- custom marketing strategies,

- advertising,

- store design and presentation,

- customer service,

- staff training,

- inbound logistics and warehousing,

- maintenance of website/servers,

- catalogue production,

- trademarks and trade names,

- transfer of title for merchandise, and

- after sales support.

In Australia your responsibilities are for the in-bound logistics and warehousing of inventory for both web and retail based orders from the Australian branch customers. In order to carry on this element of your business you have at your disposal a rented place of storage owned by an unrelated third party. You are dependent on this location in order to dispatch product to the Australian branch.

You are a subsidiary of an international parent company and the Australian branch is also a subsidiary of an international company which is ultimately owned by your parent. As such you are both indirectly wholly-owned subsidiaries of the same international parent.

Article X(2) of the Overseas Country Agreement further illustrates the general definition by providing listed facilities that are included in the definition:

"(a) a management;

(b) a branch;

(c) an office;

(d) a factory;

(e) a workshop;

(f) a mine, quarry or other place of extraction of natural resources;

(g) an agricultural, pastoral, forestry or plantation property;

(h) a building site or a construction, installation or assembly project which exists for more than six months."

The Commentaries at paragraph 2 note that the list is not exhaustive and should only be considered in light of paragraph 1.

Article X(3) of the Overseas Country Agreement outlines scenarios where an entity will not have a PE because its goods or merchandise:

· Are stored, displayed or kept in a facility for delivery purposes,

· Are maintained for storage, display or delivery purposes,

· Are maintained for processed by another enterprise.

Neither will an PE be presumed where a fixed place of business is:

· Maintained for purchasing goods or merchandise or for collecting information,

· Maintained for the purposes of performing activities which have a preparatory or auxiliary character, such as advertising or scientific research.

The Commentaries note in paragraph 4 that it can be difficult to determine whether the activities of the entity are preparatory or auxiliary in character. Do the activities of the fixed place of business constitute an essential and significant part of the activities of the enterprise as a whole? This question should be addressed on a case by case basis.

In your case, although you have a place in Australia at your disposal which forms an important element of your business, it is used solely for the purpose of storage and delivery purposes.

Article X(5) of the Overseas Country Agreement specifies that where a person acting on behalf of the entity (other than an independent agent), shall be deemed to be a PE of that entity if:

· they recurrently exercise an authority to conclude contracts on behalf of the entity, with the exception of goods and merchandise.

With respect to Article 4(5) the commentaries explain at paragraph 5, that a person can be an individual or a company and;

"Lack of active involvement by an entity in transactions may be indicative of a grant of authority to an agent. For example an agent may be considered to possess actual authority to conclude contracts where he solicits and receives (but does not formally finalise) orders which are sent to a warehouse from which goods are delivered and where the foreign enterprise routinely approves transactions."

In your case, the Australian branch does not have the right to conclude contracts on your behalf, nor do they act as your agent in Australia the arrangement is solely the warehousing and sale of merchandise;

· Your Distribution Agreement provides that you will sell merchandise to the Australian branch for the purpose of resale to Australian customers.

· The Distribution Agreement provides that the Australian branch will operate the retail stores and serve Australian customers.

· Your only presence in Australia is your warehouse.

· The warehouse is used only for the storage of goods and merchandise.

· You do not regularly fill orders on the Australian branch's behalf.

· Customers place their orders directly with the Australian branch (online or in store).

· The Australian branch derives all revenue from the sale of goods to Australian customers.

Article X(6) of the Overseas Country Agreement states that there will not be a PE where business is carried on through a broker, general commission agent or any other agent of an independent status, where that person is acting in the ordinary course of his business as such a broker or agent.

The Commentaries clarify that a person will be considered an independent agent where:

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

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

Other consideration, are risk and control borne by agent, and that the relationship between a Parent company and its Subsidiary does not automatically demonstrate that of a dependent nature.

In your case, the Australian branch is your fellow subsidiary, and is an independent agent of your parent company, as evident by the level of control and risks borne by the Subsidiary.

In conclusion, the Commissioner is satisfied that you do not have a Permanent Establishment in Australia under the Overseas Country Agreement, because of your storage and sale of goods/merchandise or fellow subsidiary or any other factor.