Edited version of your written advice

Authorisation Number: 1013004111190

Date of advice: 18 May 2016

Ruling

Subject: Permanent Establishment

Questions and answers

1. Does the Company carry on a business in Australia through a permanent establishment for the purposes of the Permanent Establishment Article in the Australian, Country X Double Tax Agreement?

Yes.

2. Is all the income derived by the Company, directly or indirectly from Australian sources assessable income under subsection 6-5(3) of the Income Tax Assessment Act 1997?

No.

3. Does the Company carry on a business in Australia through a permanent establishment for the purposes of the Permanent Establishment Article in the Australian, Country X Double Tax Agreement when it countersigns the order form in Country X?

No.

This ruling applies for the following period

1 July 2013 to 30 June 2014

1 July 2014 to 30 June 2015

1 July 2015 to 30 June 2016

1 July 2016 to 30 June 2017

1 July 2017 to 30 June 2018

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 Country X incorporated entity and a non-resident of Australia.

The Company is a Software solution provider.

Hosted servers

To effect the provision of its services, the Company has entered into an agreement with a hosting service, which provides managed hosting services to the Company in each of the countries it trades in. The hosting service supplies the physical hardware that the Company software runs on.

The current contract comprises the lease of a dedicated server and a Firewall from the hosting service in Australia.

The dedicated hardware is situated in Australia.

The Company maintains the hosted servers directly. The hardware is managed by the hosting service but the software is managed remotely by the Company.

Supply to Australian clients

The Company has commenced making the supply of the software to Australian clients. The services supplied by the Company to the clients comprises of an annual licence which enables the use of the software.

The services supplied by the Company to clients do not comprise of physical products or goods; the Company solely supplies services.

The Company does not and has not engaged either employees or contractors to undertake duties in Australia and it does not have a formal presence (such as an office) in Australia.

Clients cannot purchase the software licence directly through an Australian website owned by the Company; the Company has no Australian website.

Clients must contact or be contacted by sales support in Country X, whom discuss the client's requirements and recommends suitable resources which will best meet the client's operational needs.

When the client's requirements are determined an order form is issued to them to sign.

The client reviews the order form and signs it in confirmation that the services documented on the form are as requested. Once signed, the order form is counter signed in Country X by an authorised person.

Having confirmed the engagement, the client is sent their individual login information and temporary password to access the software.

Depending on the exact needs and requirements of the Australian clients, some may be served/hosted on the Country X server whilst others may be served/hosted on the Australian server; this is determined by the client and any work done through the software will be saved on that allocated server.

The potential client is informed in the sales process that they can be hosted on a Country X server or an Australian server and the customer decides which they prefer. There are no differences in fees or product base on the server choice.

There are a number of Australian clients hosted on the Australian server.

The Company has interaction with the Australian clients after providing them with the log in details. The Company provides both start-up and on-going training to its users via webinars and videos. Further as a source of additional training, email updates are occasionally sent out to all of their clients making them aware that new information or help guides are available. These help documents are saved on the client's platform and hosted on their dedicated platform.

The Company provides on-going technical support to the Australian clients via e-mail, help desk ticket, phone calls to speak to a client services representative and webinars.

Under the Terms, technical support and services is performed the same for both Country X clients and Australian Clients. They are performed by the Company technical support staff members located in Country X. The clients can notify the Company either by filling out an "online ticket" through a third-party provider or by calling the Company directly.

Server outages or software bugs are reported to the Company's staff who work to resolve these issues internally. The fee for technical support and services is included in the annual cost of the license and is not broken out separately.

Upgrades

Under the Terms, in relation to the Company platforms and upgrades, the licensor shall deliver to licensee such the Company platform upgrades by means of installing them on the Server operated by Licensor.

Upgrades for the web-based platform go out regularly, i.e. weekly minor bug fixes and enhancements to the Company software. The Company launches new features or updates approximately once a month which are loaded/installed on their servers. Clients are notified through the Company's Helpdesk (located on the Country X server) when upgrades become available.

The Company Mobile application upgrades are distributed through the iOS app store, the google play store and the amazon marketplace. The Company makes the upgrades available through these distribution channels; however the client must select to upgrade as they would for other mobile applications.

Charges may apply for the labour associated with migrating existing customization during implementation of an upgrade, however customization services have not been provided to an Australian client. In the event customization services were required by an Australian client, the work would be performed by the Product Development team based in Country X.

Australian reseller of the Company's software

In addition to supplying the Company software licences to Australian end users, the Company also have a reseller agreement with an Australian entity.

In undertaking the requirements of the agreement, the Reseller acts as principal in making the supply to their client. The Australian website is operated and owned by the Australian Reseller.

The Reseller markets and sells the product on its own right. The client signs a contract with the Reseller, is invoiced by them and remits payment to the Reseller. When a new client signs on with the Reseller, the Reseller provides the Company with an account set-up form that contains the client's information.

The Company provides the client with access to the Company platform, which is provided back to the Reseller, who in turn provides it to its client. The Reseller is responsible for on-boarding the new client.

Under the Reseller's agreement, a third-party client will go through the Reseller for all support needed. They do not receive support from the Company's staff located in in their Country X offices. Should the Reseller not be able to resolve the issue on its own, the Reseller can contact the Company for guidance and resolution.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 subsection 6-5(3)

International Tax Agreements Act 1953 Section 3AAA

International Tax Agreements Act 1953 Section 3AAB

International Tax Agreements Act 1953 subsection 4(1)

International Tax Agreements Act 1953 subsection 4(2)

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 considered the application of Part IVA to the arrangement you asked us to rule on.

Reasons for 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.

The income derived by the taxpayer from the sale of company's products to Australian consumers is ordinary income.

Section 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) defines a Permanent Establishment as: 

a place at or through which the person carries on any business. 

The definition is expanded by paragraphs (a) to (d) which includes a number of non- exhaustive examples in the definition.  

Taxation Ruling TR 2002/5 provides the Commissioners interpretation of the meaning of the above phrase. The Ruling as contained in paragraph 9 of TR 2002/5 is as follows: 

The subsection 6(1) definition of PE [Permanent Establishment] is based on the concept of PE used in Australia's tax treaties. For the purposes of the definition of PE in subsection 6(1) 'a place at or through which [a] person carries on any business' is a reference to a place used for carrying on that person's business activities. That place must have an element of permanence, both geographic and temporal. Permanence must be construed in the context of each particular business and is a question of fact and degree. Permanent in this context does not mean forever.

In determining liability to Australian tax on Australian sourced income received by a non-resident, it is necessary to consider not only the income tax laws but also the applicable agreement as defined in section 3AAA or section 3AAB of the International Tax Agreements Act 1953 (Agreements Act).

Subsection 4(1) of the Agreements Act incorporates the ITAA 1936 and the ITAA 1997 so that those Acts are read as one with the Agreements Act.

Subsection 4(2) of the Agreements Act, provides that the Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Taxation Ruling TR 2001/13 at paragraphs 101 to 105 explains the Commissioner's view that the Commentaries on the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital are relevant to interpreting Australia's tax treaties (OECD Commentary). Accordingly, the Commentary on the OECD Model Tax Convention is relied upon and is cited below.

An Article of the Convention governs the taxation of business profits derived from Australia by a resident of Country X. Under the Article, the business profits of an enterprise of Country X shall be taxable only in Country X unless the enterprise carries on business in Australia through a permanent establishment situated in Australia.

The term 'permanent establishment' is defined in the Article of the Convention as a fixed place of business through which the business of an enterprise is wholly or partly carried on.

A Paragraph of the Commentary on the Article of the OECD Model Tax Convention explains that the definition of permanent establishment contains the following requirements:

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

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

• 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.

An Article of the Convention contains a list of examples, each of which can be regarded as constituting a permanent establishment, such as a place of management, an office, a branch, a factory or a workshop, etc.

An Article of the Convention identifies circumstances where a permanent establishment will be deemed to exist. An Article of the Convention provides that an enterprise of Country X will be deemed to have a permanent establishment in Australia if the 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.

Computer equipment and software are discussed in a paragraph of the OECD Commentary in relation to the Article, It states:

Whilst a location where automated equipment is operated by an enterprise may constitute a permanent establishment in the country where it is situated (see below), a distinction needs to be made between computer equipment, which may be set up at a location so as to constitute a permanent establishment under certain circumstances, and the data and software which is used by, or stored on, that equipment. For instance, an Internet web site, which is a combination of software and electronic data, does not in itself constitute tangible property. It therefore does not have a location that can constitute a "place of business" as there is no "facility such as premises or, in certain instances, machinery or equipment" (see paragraph 2 above) as far as the software and data constituting that web site is concerned. On the other hand, the server on which the web site is stored and through which it is accessible is a piece of equipment having a physical location and such location may thus constitute a "fixed place of business" of the enterprise that operates that server.

Further clarification is provided in a paragraph of the OECD Commentary on the Article, explains;

The distinction between a web site and the server on which the web site is stored and used is important since the enterprise that operates the server may be different from the enterprise that carries on business through the web site. For example, it is common for the web site through which an enterprise carries on its business to be hosted on the server of an Internet Service Provider (ISP). Although the fees paid to the ISP under such arrangements may be based on the amount of disk space used to store the software and data required by the web site, these contracts typically do not result in the server and its location being at the disposal of the enterprise, even if the enterprise has been able to determine that its web site should be hosted on a particular server at a particular location. In such a case, the enterprise does not even have a physical presence at that location since the web site is not tangible. In these cases, the enterprise cannot be considered to have acquired a place of business by virtue of that hosting arrangement. However, if the enterprise carrying on business through a web site has the server at its own disposal, for example it owns (or leases) and operates the server on which the web site is stored and used, the place where that server is located could constitute a permanent establishment of the enterprise if the other requirements of the Article are met.

Application to your circumstances

To effect the provision of its services, the Company has entered into an agreement with the hosting service, which provides managed hosting services to the Company in each of the countries it trades in globally. The hosting service supplies the physical hardware that the Company software runs on.

The Company's current contract with the hosting service comprises the lease of a dedicated server and a Firewall in Australia.

The Company maintains the hosted servers directly. The hardware is managed by the hosting service but the software is managed remotely by the Company.

As per a paragraph of the OECD Commentary on the Article of the Convention, the Company's activities, when using their dedicated server in Australia, is being carried on through a fixed place of business in Australia.

Accordingly, that fixed place of business is a permanent establishment for the purposes of the Convention.

Consequently, any income derived by the Australian clients, hosted on the dedicated Australian server, is assessable income under subsection 6-5(3) of the ITAA 1997.

In relation to whether the Company carries on a business in Australia through a permanent establishment when it countersigns the order form in Country X; when the client's requirements are determined an order form is issued to them to sign, the client reviews the order form and signs it; the order form is then counter signed in Country X by an authorised person.

Having confirmed the engagement, the client is sent their individual login information and temporary password to access the software.

The counter signing of the order form in Country X does not meet the definition of permanent establishment.

Therefore the Company is not carrying on a business through a permanent establishment when it counter signs the order forms in Country X.