Edited version of your written advice

Authorisation Number: 1013114696464

Date of advice: 11 November 2016

Ruling

Subject: Permanent Establishment

Question 1

Did Company A carry on a business in Country X through a permanent establishment for the purposes of Article Z of the Australia-Country X Double Tax Agreement ('Country X Agreement')?

Answer

No

Question 2

Is Company A required to attribute any profits to the carrying on of a business in Country X through a permanent establishment for the purposes of Article Y of the Country X Agreement?

Answer

As the answer to Question 1 is negative, this question is not applicable.

This ruling applies for the following period:

1 January 20XX to 30 June 20XX

The scheme commences on:

1 January 20XX

Relevant facts and circumstances

Company A is an Australian incorporated company and a resident of Australia for tax purposes.

Company A is centrally managed and controlled in Australia where all strategic decision making, financial management and Board of Director meetings take place.

Company A is a wholly owned subsidiary of Company B, a company not incorporated in Australia. Company B and their wholly owned subsidiaries are collectively referred to as the 'Company Group'.

During the relevant time period in 20XX, Company A entered into tender negotiations with Company P, an unrelated third party incorporated in Country X. These tender negotiations covered the development of a project.

The preliminary meetings seeking to enter into a potential contract and the subsequent tender negotiations for the Company P contract were undertaken at the Company P offices in Country X. Company A has not previously had a presence or undertaken any contract negotiations in Country X.

The tender negotiations were performed in Country X on behalf of Company A by a number of representatives of Company C, a company incorporated in Country W and a wholly owned subsidiary of Company Group. The role and responsibility of the representatives in Country X was limited to attending preparatory tender meetings regarding the negotiation of the contract.

The representatives were not authorised to sign and/or conclude the contract in Country X on behalf of Company A. The Company Group have procedures and policies in place requiring authorisation of the managing director and legal department prior to any contract approvals.

The tender negotiations took place in Country X over a cumulative number of weeks during 20XX.

The Company A representatives stayed in temporary accommodation in Country X during the negotiation periods. Company A did not enter into any contracts or agreement for the lease of premises in which to conduct its business activities. Company A continuously used its Australian office as its only place of business.

Company A had no other employees or representatives acting on its behalf in Country X during the negotiation periods. Company A did not have any substantial equipment in Country X during the negotiation periods.

Negotiations were finalised in 20XX when the contract was approved by an Executive of Company A before being sent to Country X for signature by Company P.

Relevant legislative provisions

International Tax Agreements Act 1953 section 4

International Tax Agreements Act 1953 section 5

Agreement between the Government of Australia and the Government of Country X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income

Reasons for decision

Each of Australia's double tax agreements is a bilateral agreement between Australia and another country under which Australia undertakes to apply its taxation laws in accordance with the terms of the agreement it has negotiated.

Any applicable double tax agreement referred to by the International Tax Agreements Act 1953 (Agreements Act) must be considered to determine which country has a taxing right in respect of the income derived by a resident of either country.

Section 4 of the Agreements Act incorporates the Agreements Act with the Income Tax Assessment Act 1997 and Income Tax Assessment Act 1936 ('Assessment Acts') so that those Acts are to be read as one. Subsection 4(2) of the Agreements Act states that the provisions contained in the Agreements Act have effect notwithstanding anything inconsistent with those contained in the Assessment Acts.

Each current Australian double tax agreement is given the force of law domestically in Australia under section 5 of the Agreements Act.

Country X Agreement

The Country X Agreement operates to avoid the double taxation of income received by Australian and Country X resident entities.

Article Y of the Country X Agreement states that the business profits of an Australian enterprise shall be taxable only in Australia unless the enterprise carries on business in Country X through a permanent establishment situated in Country X.

Permanent establishment

Article Z of the Country X Agreement concerns the definition of permanent establishment.

Article Z(1)

The term 'permanent establishment is defined in Article Z(1) of the Country X Agreement as:

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

The phrase 'fixed place of business' is not defined in the Country X Agreement.

Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements (TR 2001/13) discusses the Commissioner's views about interpreting tax treaties. Paragraphs 102 to 105 of TR 2001/13 explain that the Commentaries on the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital ('OECD Commentary') provide important guidance on interpreting tax treaties. This approach was also accepted by the High Court in Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338; 90 ATC 4717; (1990) 21 ATR 531. Accordingly, the OECD Commentary is relied upon in interpreting the Country X Agreement, and where relevant, is discussed in detail below.

Paragraph 2 of the OECD Commentary on Article 5 (which in the OECD Model Tax Convention is the article defining 'permanent establishment') explains that in relation to the general definition contained in paragraph 1 of Article 5 of the OECD Model Tax Convention, three conditions are required to be met for a permanent establishment to exist:

● there must be a place of business;

● the place of business must be fixed so that there is a distinct location with a certain degree of geographical and temporal permanence; and

● the business of the enterprise must be conducted through that fixed place.

Paragraph 4 of the OECD Commentary on Article 5 provides:

The term 'place of business' covers any premises, facilities or installations used for carrying on the business of the enterprise, whether or not they are used exclusively for that purpose. A place of business may exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. It is immaterial whether the premises, facilities or installations are owned or rented by the enterprise or are otherwise at the disposal of the enterprise. … Again the place of business may be situated in the business facilities of another enterprise. This may be the case for instance where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise.

However, paragraph 4.2 of the OECD Commentary on Article 5 provides that “the mere presence of an enterprise at a particular location does not necessarily mean that the location is at the disposal of the enterprise.” This principle is illustrated by a salesman who regularly visits a major customer to take orders and meets the purchasing director in his office to do so. In this instance the customer's premises are not at the disposal of the enterprise for which the salesman is working and therefore do not constitute a fixed place of business.

Paragraph 6 of the OECD Commentary on Article 5 suggests that a permanent establishment can exist only if the place of business has a certain degree of permanency and is not of a purely temporary nature. A place of business may, however, constitute a permanent establishment even though it exists, in practice, for a very short period of time because the nature of the business is such that it will only be carried on for that short period of time.

Article Z(2)

Article Z(2) of the Country X Agreement contains a list of examples that can be regarded, prima facie, as constituting a permanent establishment. As discussed at paragraph 12 of the OECD Commentary on Article 5, these examples only constitute a permanent establishment if they also meet the general definition in Article 5(1).

Article Z(3)

Article Z(3) of the Country X Agreement lists a number of business activities which are treated as exceptions to the general definition of permanent establishment under Article Z(1). Under these exceptions, an enterprise shall not be deemed to have a permanent establishment merely because certain activities are conducted, even if the activities are carried on through a fixed place of business.

Article Z(4)

An entity will be deemed to have a permanent establishment and to carry on business through that permanent establishment under Article Z(4) of the Country X Agreement if either of the following activities are being undertaken:

a. the entity carries on supervisory activities in that State for more than 6 months in connection with a building site, or a construction, installation or assembly project, which is being undertaken in that State; or

b. the entity performs services, including consultancy or managerial services, in that Contracting State through employees or other personnel engaged by the enterprise for such purpose, but only where such activities continue in that State for the same project or a connected project for a period or periods aggregating more than 183 days within any 12 month period; or

c. substantial equipment is being used in that State by, for or under contract with the enterprise.

Relevant to interpreting paragraph Z(4)(a) of the Country X Agreement, paragraph 19 of the OECD Commentary on Article 5 provides “a site exists from the date on which the contractor begins his work, including any preparatory work, in the country where the construction is to be established.”

Article Z(5)

Article Z(5) of the Country X Agreement provides that the actions of a person acting on behalf of an entity will deem a permanent establishment to arise if:

… (a) the person has, and habitually exercises in that State, an authority to conclude contracts on behalf of the enterprise, unless the person's activities are limited to the purchase of goods or merchandise for the enterprise …

Paragraph 32 of the OECD Commentary on Article 5 outlines that Article 5(a) proceeds on the basis that only people “having the authority to conclude contracts can lead to a permanent establishment for the enterprise maintaining them.”

Paragraph 33 of the OECD Commentary on Article 5 provides

… A person who is authorised to negotiate all elements and details of a contract in a way binding on the enterprise can be said to exercise this authority “in that State”, even if the contract is signed by another person in the State in which the enterprise is situated or if the first person has not formally been given a power of representation. The mere fact, however, that a person has attended or even participated in negotiations in a State between an enterprise and a client will not be sufficient, by itself, to conclude that the person has exercised in that State an authority to conclude contracts in the name of the enterprise….

Article Z(6)

Where an entity carries on business dealings in another country through a broker, general commission agent or any other agent of an independent status, Article Z(6) of the Country X Agreement provides the entity will not be deemed to have a permanent establishment.

Article Z(7)

Article Z(7) of the Country X Agreement provides that the existence of a subsidiary company does not, of itself, constitute that subsidiary company a permanent establishment of its parent company.

Application to your circumstances

The paragraphs within Article Z of the Country X Agreement are considered separately below with reference to Company A's circumstances.

Article Z(1)

During the relevant time period in 20XX, Company A entered into tender negotiations with Company P, an unrelated third party incorporated in Country X. The negotiations were performed in Country X on behalf of Company A by a number of individuals. The role and responsibility of the representatives in Country X was limited to attending preparatory tender meetings regarding the negotiation of the contract.

The negotiations were conducted at the offices of Company P in Country X. These offices are used by Company P to carry on their own business. Company A does not own, lease or otherwise control the Company P offices. Even though the place of negotiations is situated in the business facilities of another enterprise, the premises of Company P are not at the disposal of Company A. The negotiations took place over a number of weeks, highlighting the short term nature of Company A contract negotiation activities in Country X during the ruling time period.

Therefore, as the premises of Company P are not at the disposal of Company A to conduct its business in Country X, it could not be considered as constituting a fixed place of business from which Company A carried on its business in Country X. Consequently, Company A does not have a permanent establishment as defined in Article Z(1) of the Country X Agreement during the business negotiation activities conducted during the ruling time period.

Article Z(2)

The examples outlined in Article Z(2) of the Country X Agreement have no application as Company A does not satisfy the general definition of a permanent establishment under Article Z(1).

Article Z(3)

As Company A does not maintain a fixed place of business in Country X relating to the contract negotiations during the ruling time period, the exclusions in Article 5(3) have no application.

Article Z(4)

A building site or construction project will only commence to exist when the contractor begins their work. During the relevant time period, Company A were undertaking tender negotiations with Company P and were yet to sign a contract or begin any work, preparatory or otherwise, in Country X. Company A did not carry on supervisory activities in Country X for more than 6 months in connection with a building site, or a construction, installation or assembly project in Country X. Therefore, paragraph Z(4)(a) of the Country X Agreement has no application.

The representatives of Company A were only present in Country X for a number of weeks for the purpose of assisting with tender negotiations. The representatives did not provide services on behalf of Company A and were not in Country X for more than 183 days in any 12 month period, therefore paragraph Z(4)(b) of the Country X Agreement has no application.

Company A did not have any substantial equipment in Country X during the ruling time period, meaning paragraph Z(4)(c) has no application.

Therefore, Article Z(4) of the Country X Agreement does not deem Company A to have a permanent establishment in Country X relating to the contact negotiations undertaken during the ruling time period.

Article Z(5)

During the tender negotiation period Company A had representatives in Country X who acted on behalf of the entity. These representatives had not previously acted or been present in Country X on behalf of Company A. The role and responsibility of the representatives in Country X was limited to attending preparatory tender meetings regarding the negotiation of the contract. The representatives were not authorised to sign and/or conclude the contract in Country X on behalf of Company A. The Company Group have procedures and policies in place requiring authorisation of the managing director and legal department prior to any contract approvals.

The binding contract with Company P was approved by an Executive of Company A in 20XX, prior to being sent to Country X for signature by Company P.

Additionally, the representative's activities in Country X are not considered to be habitually repetitive as the tender negotiations occurred over a number of weeks and were for a one-off contract in Country X.

As none of the Company A representatives in Country X had any authority to conclude contracts on behalf of Company A, paragraph Z(5)(a) of the Country X Agreement has no application to deem a permanent establishment of Company A.

Paragraph Z(5)(b) of the Country X Agreement has no application on the basis that Company A did not have any representatives in Country X manufacturing or processing goods on its behalf.

Article Z(6) and Article Z(7)

Article Z(6) and Article Z(7) are not relevant to your circumstances and have no application.

Question 2

As previously mentioned, Article Y of the Country X Agreement provides the business profits of an Australian entity will be taxable only in Australia unless the entity carries on business in Country X through a permanent establishment situated in Country X, in which case, the profits can be taxed in Country X but only so much as is attributable to that permanent establishment.

As concluded at question 1, Company A did not carry on business in Country X through a permanent establishment during the time period of the tender negotiations in Country X. Therefore, question 2 is not applicable.