Edited version of your written advice

Authorisation Number: 1051455818264

Date of advice: 07 December 2018

Ruling

Subject: Permanent Establishment

Question 1

Does Overseas Co prima facie have a permanent establishment in Australia under Article 4(1) or (2) of the Overseas Double Tax Agreement (DTA)?

Answer

Yes.

Question 2

Does Overseas Co prima facie have a deemed permanent establishment in Australia under Article 4(3) of the Overseas Agreement?

Answer

Yes.

Question 3

Does Article 4(4) of the Overseas DTA apply to exclude primia facie permanent establishment of Overseas Co in Australia?

Answer

No.

Question 4

Does Overseas Co prima facie have a deemed permanent establishment in Australia under Article 4(5)(b) of the Overseas DTA?

Answer

Yes.

Question 5

Does Article 4(6) of the Overseas DTA apply to exclude Overseas Co from having a prima facie deemed permanent establishment in Australia?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2018

The scheme commences on:

01 July 20XX

Relevant facts and circumstances

(1) On 01 July 20XX a company (part of a larger commodity trading group) incorporated in Overseas (Overseas Co) had acquired an Australian resident company (Australia Co) that owned and operated a storage facility located in Australia that was used to store a commodity.

(2) Shortly after acquisition of Australia Co, a Storage and Handling agreement was entered into which had the following key features:

(a) Australia Co will store the commodity imported into Australia by Overseas Co.

(b) Overseas Co will retain ownership of the commodity and Australia Co retains full possession and control of the storage facility at all times.

(c) Overseas Co is charged a service fee at market rates.

(3) Overseas Co is the only customer of Australia Co.

(4) In around August 20YY, the corporate group also incorporated a separate company (Sales Co) in Australia had the role of selling the commodity to third party Australian customers.

(5) Sales Co could not import the commodity directly into Australia until it was appropriately licenced and financed. This did not occur until 1 July 20YY. During this one year period, third party customers would approach Sales Co to order the commodity and then Sales Co would purchase this commodity from Overseas Co which was stored at the commodity storage facility.

(6) Australia Co facilitated the sales of commodities between Overseas Co and Sales Co by transferring the commodity within the facility. In addition, the new owner of the commodity, Sales Co had no formal storage agreement with Australia Co. Effectively Australia Co was storing the commodity for Sales Co at no charge.

(7) Australia Co at the direction of either Overseas Co (or another entity in the wider group) gives instructions to Australia Co to dispense the commodity to third party customer trucks arriving at the facility on a regular basis to have their commodity order filled.

(8) After 1 July 20YY, Sales Co was licenced to import their own commodities and stored these commodities at the facility owned and operated by Australia Co under its own Storage and Handling Agreement.

Relevant legislative provisions

Australia/Overseas Double Tax Agreement 1969, Article 4(1)

Australia/Overseas Double Tax Agreement 1969, Article 4(2)

Australia/Overseas Double Tax Agreement 1969, Article 4(3)

Australia/Overseas Double Tax Agreement 1969, Article 4(4)

Australia/Overseas Double Tax Agreement 1969, Article 4(5)

Australia/Overseas Double Tax Agreement 1969, Article 4(6)

Australia/Overseas Double Tax Agreement 1969, Article 4(7)

Reasons for decision

Question 1 Does Overseas Co prima facie have a permanent establishment in Australia under Article 4(1) or (2) of the Overseas Double Tax Agreement (DTA)?

Summary

Overseas Co does prima facie have a permanent establishment in Australia under Articles 4(1) or (2) because the facility is a fixed place of business through which the commodity trading business of Overseas Co is partly carried on.

Detailed reasoning

For the purposes of the Overseas DTA, the term ‘permanent establishment’ means a fixed place of business through which the business of an enterprise is wholly or partly carried on. The Overseas DTA also goes on to say that the term ‘permanent establishment’ shall include among other things, a place of management; a branch; an office, a factory or a workshop.

In Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements, the Commissioner accepts that in interpreting the wording of a tax treaty, it is appropriate to have reference to the OECD Commentary on the Model Tax Convention on Income and on Capital 2017 (the OECD Commentary).

Paragraph 2 of the OECD Commentary on Article 5 explains that the definition of ‘permanent establishment’ has the following conditions:

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

● the place of business must be “fixed”, i.e. it must be established at a distinct place with a certain degree of permanence, and

● 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.

Place of business

Paragraph 10 of the Updated OECD commentary provides that 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. It further provides that:

● a place of business may also 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 or otherwise at the disposal of the enterprise, and

● 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.

Paragraph 10 of the Updated OECD Commentary on Article 5 provides that a ‘place of business’ may also exist where no premises are available or required for carrying on a 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 or is otherwise at the disposal of the enterprise.

Applying paragraph 10 to the facts of this ruling application, we can see that the commodity that is stored at the commodity storage facility would be at the disposal of Overseas Co despite the fact that the facility is owned and operated by Australia Co. We also note that the commodity itself is owned by Overseas Co and Overseas Co is in a superior position within the corporate group to that of Australia Co. In addition to this, during the ruling period, Overseas Co was Australia Co’s only customer.

Although Overseas Co does not have physical presence in terms of its own employees or an office at the storage facility, it imports the commodity and stores that it in the storage tanks - and then sells the commodity to Sales Co on a regular basis, who in turn sells commodities to its third party customers.

Paragraph 20 of the commentary on Article 5 of the Updated OECD Commentary provides that, for an enterprise to have a “fixed place of business through which (emphasis added) the business.is carried on” under Article 4(1), that place must be a particular location that is “at the disposal” of the enterprise for that purpose. This paragraph also states that the phrase ‘through which’ must be given a wide meaning so as to apply to any situation where business activities are carried on.

The wide meaning given to the phrase ‘through which’ gives a wide interpretation of what ‘at the disposal’ actually covers. We consider that Overseas Co giving directions to Australia Co to transfer the commodity to the ownership of Sales Co (who had no formal storage agreement with Australia Co during the ruling period) would lead to a reasonable observation that the facility is ‘at the disposal’ of Overseas Co.

Any space or premises belonging to a subsidiary that is at the disposal of the parent company and that constitutes a fixed place of business through which the parent carries on its own business will constitute a permanent establishment of the parent.

Although there may be a Storage and Handling Agreement in place, Overseas Co who has a superior standing in the corporate group, is using the storage tanks not to just store commodities in a bonded environment but to rather to enlist Australia Co to help facilitate the sale of commodities to Sales Co who in turn sells these commodities to third parties.

For practical purposes, Overseas Co does not need to own the tanks or be able to access the facility. But Australia Co which has a lower standing than Overseas Co in the corporate group, has Overseas Co as its only customer and main source of revenue and this would put Overseas Co in a greater position to direct Australia Co’s management of the commodities stored at the facility.

To this end, we consider that the facility owned by Australia Co would be at the disposal of Overseas Co because it’s a fixed place of business through which Overseas Co commodity trading business is carried on through its sales of commodities to Sales Co.

The ‘carrying on of the business’

For a place of business to constitute a permanent establishment the enterprise using it must be ‘carrying on its business’ wholly or partly through it.

Paragraph 6 of the Updated OECD Commentary provides that this requirement usually means that persons who, in one way or another, are dependent on the enterprise’s conduct its business in the State in which the fixed place is situated.

Also, Thiel v FCT (1990) 171 CLR 338 at 359 states that:

‘…the carrying on of a business requires the habitual pursuit of business activities.’14 The phrase ‘a place at or through which a person carries on any business’ thus requires a place - something of permanence - at or through which the habitual pursuit of business activities (also something of permanence) occurs.

We consider that Overseas Co is carrying on the business of selling commodities in Australia through the commodity storage facility located in Australia.

We also note paragraph 40 of Taxation Ruling TR 2014/3 which states that:

40. In the vast majority of cases it is likely that having, using or installing substantial equipment or substantial machinery at a place will also entail the carrying on of business.

The business of Overseas Co is to trade a certain type of commodity and to take advantage of investment opportunities in this field.

From the perspective of the Australian arm of Overseas Co’s commodity trading business, Australia Co which has Overseas Co as its only customer, is dependent on Overseas Co for instructions on when to transfer commodities to Sales Co after it has been sold to it by Overseas Co. Moreover, the facility by its substantial size, would have a strong degree of permanence from which these commodities can be transferred from Overseas Co to Sales Co during the ruling period.

During the ruling period, Australia Co owned and operated the facility by storing and handling commodities for its only customer, Overseas Co. As part of the handling, these commodities were transferred within the facility on the instructions of Overseas Co.

During the ruling period, Australia Co transferred oil between tanks and would have made other on site preparations in order to facilitate the sale of oil by Overseas Co to Sales Co. This was crucial to the business of selling commodities through Sales Co to its Australian customers. Also during this time, there was no Storage Agreement in place between Sales Co and Australia Co who were now the new owners of the commodities before it was sold to the third party customers.

After the commodities are transferred (as a result of the sales transaction between Sales Co and Overseas Co), Australia Co, on instruction of either Sales Co or Overseas Co itself, Australia Co made the facility available to third party customers in order to dispense the commodities to their storage trucks on a regular basis.

This repetition and regularly of this activity may also be indicative that a business is carried on and this characteristic has judicial support in cases such as Ferguson v FCT (1979) 36 FLR 310.

The place of business must be ‘fixed’

The definition of a Permanent Establishment requires that a place of business must be ‘fixed’. In the normal way, there has to be a link between the place of business and a specific geographical point. The OECD Commentary provides guidance on what is required for the ‘place of business’ to be considered ‘fixed’ both geographically and temporally.

At paragraph 6 it states that a fixed place of business is one where there is a certain degree of permanency, if it is not of a purely temporary nature.

In this instance, during the ruling period, the facility was located in Australia, would be a place of business that is ‘fixed’. The commodity storage facility is an immoveable property. All the commodity transfers (sales) between Sales Co and Australia Co occurred at the facility. Moreover, the dispensing of this commodity to third party customers also occurred at this facility.

The storage facility and the application of Article 4(2) of the Overseas Agreement

Under this article a non-exhaustive list is provided of types of ‘permanent establishments’ which includes a branch, an office, a store or sales outlet, a factory, a workshop, a mine or a warehouse.

The ordinary meaning of ‘warehouse’ then Article 4(2)(g) of the Overseas Agreement may have application.

A popular definition given is reproduced below:

A warehouse is a commercial building for the storage of goods

and

A customised storage building—a warehouse—enables a business to stockpile goods, eg, to build up a full load prior to transport, or hold unloaded goods before further distribution, or store goods like wine and cheese that require maturation. As a place for storage, the warehouse has to be secure, convenient, and as spacious as possible, according to the owner’s resources, the site and contemporary building technology. Before mechanised technology developed, warehouse functions relied on human labour,using mechanical lifting aids like pulley systems (emphasis added).

It could be interpreted that the facility acts like a warehouse- because this facility has a purpose that extends beyond the mere storage of this commodity, but also to sell and distribute this commodity through Australia Co’s associate (within the corporate group) to third party customers.

Therefore, the facility located in Australia may be a type of permanent establishment listed under Article 4(2)(g), that is a warehouse.

Concluding comments

After considering the activities of Australia Co are largely under the instructions ofCo, it is submitted that the business of the enterprise is at a minimum partly carried on at the commodity storage facility. The commodity storage facility is fixed – and the business of Overseas Co is partly carried on in Australia through a fixed place of business. And on this basis, the commodity facility is ‘at the disposal’ of Overseas Co.

Therefore, Overseas Co does prima facie have a permanent establishment in Australia under Articles 4(1) or (2) of the Overseas DTA.

Question 2 Does Overseas Co prima facie have a deemed permanent establishment in Australia under Article 4(3) of the Overseas Agreement?

Summary:

A permanent establishment of Overseas Co is deemed to exist in Australia under Article 4(3)(b) of the Overseas DTA because substantial equipment (being the Facility), is being used in Australia by, for or under contract with Overseas Co.

Detailed reasoning

Paragraph (4)(3)(b) of the Overseas Agreement provides that an enterprise of one country shall be deemed to have a permanent establishment in the other country, if substantial equipment is being used or installed in the other Country by for or under contract with the enterprise. This position is reflected in Australia’s reservation to the OECD Model.

This provision applies irrespective of whether a permanent establishment under Article 4(1) actually exists.

Paragraphs 37-38 of Taxation Ruling TR 2014/3 note that:

37. The scope of the deeming rule in the Overseas Agreement definition of PE which broadly corresponds to the extended meaning conveyed by paragraph (b) of the subsection 6(1) definition was considered by the Full Federal Court in McDermott Industries (Aust) Pty Ltd v. FCT. The Court rejected the Commissioner’s contention that the scope of Article 4(3)(b) of the Overseas Agreement was governed or constrained by the primary meaning of PE in Article 4(1). The Court noted that the provision ‘probably operates to deem something to be that which otherwise it might not be’ and as it may ‘operate to expand the operation of Article 4(1) then no reading down of Article 4(3) by reference to Article 4(1) will be possible’.

38. Applying this interpretative approach to the definition of permanent establishment and the words of inclusion in paragraph (b) of the subsection 6(1) definition, it is apparent that this paragraph expands the scope of the term beyond the primary meaning to include something which otherwise it might not be within the primary meaning. The meaning of the paragraph should not be coloured by the primary meaning of PE – but construed on the basis of the express language used.

39. Moreover, the matters covered by the primary meaning and the extended meaning under paragraph (b) are not mutually exclusive. The words of inclusion do not limit the generality of the primary meaning. Accordingly, something that is a PE within the extended meaning may also be a PE under the primary meaning.

40. In the vast majority of cases it is likely that having, using or installing substantial equipment or substantial machinery at a place will also entail the carrying on of business.

Substantial equipment in Australia

The Commissioner considers that the term “equipment” does not have a narrow meaning and would include tools, implements, machinery and apparatus. The term “substantial” is defined in both relative (i.e. given the context) and in absolute terms (refer paragraphs 105 and 110 of TR 2007/10).

The key requirement of Article 4(3)(b) is whether the substantial equipment is “used by, for or under contract with the enterprise”.

As noted above, the leading court case discussing the meaning of this phrase in respect of the Overseas DTA was considered in the Full Federal Court decision in McDermott Industries (Aust) Pty Ltd v FC of T 2005 ATC 4,398 (“McDermott”).

Hill, Sundberg and Stone JJ stated that:

39. There is nothing particularly difficult about the language used in Article 4(3) of the Overseas Agreement. … All that is required is that there be a use of the equipment in Australia and that the use be “under contract”. …

Context – The structure of Article 4 …

59. …Article 4(3)… is a deeming provision and as such probably operates to deem something to be that which otherwise it might not be. That deeming goes beyond there being a deeming of a permanent establishment. It operates as well to deem the enterprise to be carrying on trade or business through the deemed permanent establishment. …

The words “by, for or under contract”…

63. … It is difficult to conclude that the “for” part of the expression was intended to be limited to cover use under supervision, whether or not such use might be comprehended within it. The most obvious set of facts falling within the second alternative would be where the other person referred to uses the equipment for the benefit of the enterprise. … There is no reason to believe that the three categories are necessarily mutually exclusive.

64. …the normal meaning of Article 4(3) is that it extends to three alternative classes of case. The first of the three separate or alternative cases referred to will be use of the substantial equipment by the enterprise itself. The second class of case will be use of the substantial equipment “for” the enterprise. The third class of case will be use of the substantial equipment under a contract with the enterprise. …

Does Overseas Co have a permanent establishment in Australia due to ‘substantial equipment’?

The Facility (or parts of the Facility) is likely to represent substantial equipment. The Facility, which is made up of various components would likely constitute “equipment”. And given its vast size and value the equipment is likely to be “substantial”.

Australia Co is an Australian resident company which is ultimately controlled by Overseas Co, a non-resident Overseas Company. Australia Co and Overseas Co have entered into a Storage Agreement as outlined in the facts above.

Under this Storage Agreement, Australia Co has the responsibility to store and maintain the commodity supplied by Overseas Co in preparation for the sale of this commodity to third parties. Overseas Co will have title to the commodity while Australia Co has ownership, control and exclusive access to the storage facility.

Despite the terms of the agreement, the conduct of the parties during the ruling period suggests that Australia Co is not in complete control of its enterprise. This is because Overseas Co is the only customer of Australia Co who as its sole customer, is Australia Co’s only source of revenue.

Overseas Co is in a far superior position to Australia Co within the corporate group and it is reasonable to infer that Australia Co would be putting the interests of the corporate group before its own interests.

In this case, Article 4(3)(b) of the Overseas Agreement effectively provides that a permanent establishment will exist if Overseas Co uses the substantial equipment in Australia or if Australia Co uses the substantial equipment in Australia for Overseas Co. We consider that both of these possibilities are met in this case.

According to the facts, Australia Co does more than just use the substantial equipment at the facility to store the commodity. Australia Co also facilitates the sale of the commodity between Overseas Co and Sales Co. To this end, the commodities are stored on behalf of Sales Co in the facility owned by Australia Co who for almost the entirety of the Ruling period did not receive fees from Sales Co for the storage of the commodities or is under any Storage Agreement. Australia Co also dispenses these commodities to third party customers at the direction of either Sales Co or another entity within the corporate group.

This is the conduct that infers that Australia Co is using its substantial equipment to further the enterprise of the corporate group facilitating the sale of commodities from Overseas Co to Sales Co so that these commodities can be sold to third party customers who are dispensed these commodities at the facility owned and operated by Australia Co.

It is for this reason that the conduct of Australia Co, Overseas Co and Sales Co implies that Australia Co is using their substantial equipment (being the storage facility) for the furtherance of the corporate group’s commodity trading enterprise within the reasoning outlined in McDermott’s case.

Accordingly, it is submitted that Overseas Co has a permanent establishment located at the facility because substantial equipment is being used by Australia Co for the furtherance of the enterprise of the wider corporate group.

We consider that the storage Facility located in Australia is substantial equipment. Overseas Co used the facility in Australia under contract with Australia Co with to store its commodities for the purpose of resale. It is important to note that there is no requirement in Article 4(3)(b) of the Overseas Agreement that the substantial equipment must be owned by the enterprise – only that it is used by, for or under contract with the enterprise. Hence, Overseas Co has a permanent establishment in Australia under Article 4(3)(b) of the Overseas Agreement.

Question 3 Does Article 4(4) of the Overseas DTA apply to exclude primia facie permanent establishment of Overseas Co in Australia?

Summary

The exclusion clauses listed under Article 4(4) have no application.

Detailed Reasoning

Article 4(4) of the Overseas DTA sets out circumstances where an enterprise is deemed not to have a permanent establishment, even if the prima facie requirements in Article 4(1) to 4(3) are satisfied.

As noted by the Court in McDermott’s case at 4,409:

“Article 4(4) operates in reverse of Article 4(3) by deeming there not be a permanent establishment as a result of certain features there set out”.

As Article 4(4) operates as an exclusion to the finding of a permanent establishment under Article 4(1) to (3), the consideration of Article 4(4) is necessary because a permanent establishment was found to exist under Article 4(1), (2) and (3).

Article 4(4) provides that an enterprise will not be deemed to have a permanent establishment merely by reason of the following activities:

(a) use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise.

(b) Maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display.

(c) Maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise

(d) Maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or for collecting information for the enterprise.

(e) Maintenance of a fixed place of business solely for the purpose of activities which have a preparatory or auxiliary character for the enterprise, such as advertising, the supply of information or scientific research.

We hold the view that paragraphs (c) and (d) above has no relevance to the facts of this case and consequently will not be considered.

Paragraph 21 of the OECD Commentary provides the following guidance on the application of the exceptions in Article 4(4).

This paragraph lists a number of business activities which are treated as exceptions to the general definition laid down in paragraph 1 and which are not permanent establishments, even if the activity is carried on through a fixed place of business.

If any of the exceptions apply, then Overseas Co will be deemed not have a permanent establishment despite the fact that a permanent establishment was deemed to exist in paragraphs (1), (2) or (3) of Article 4 to the Overseas DTA.

Application of Article 4(4)

Paragraph 4 of Article 4 of the Overseas DTA states:

An enterprise shall not be deemed to have a permanent establishment merely by the reason of:

(a) the use of the facilities solely for the reason of the purpose of storage or display of the goods or merchandise belonging to the enterprise.

This would appear to be the most readily applicable exception to the arrangement between Overseas Co and the storage tanks owned by Australia Co.

The applicant asserts that Overseas Co’s use of the facility is for the storage of imported commodities belonging to Overseas Co, and as such falls under the exclusion provision under Article 4(4)(a) of the Overseas DTA.

When reading the Article, it must be borne in mind that there is a requirement to solely use the facilities for the purpose of storing goods or merchandise.

In applying the facts of this case during the ruling period, it has been inferred that Overseas Co instructed Australia Co on a regular basis to transfer these commodities to Sales Co who in turn on-sold the commodity to third party customers. Therefore, Australia Co’s maintenance of goods was not for the sole use of storage of the commodities belonging to Overseas Co but also to facilitate the sale of commodities transferred to the ownership of Sales Co. There was also a related purpose of facilitating commodity sales in the furtherance of the enterprise of Overseas Co and the wider corporate group.

Therefore, the facility was not solely used for the storage of commodities and therefore the exception under Article 4(4)(a) has no application.

Paragraph 4 of Article 4 of the Overseas DTA states:

An enterprise shall not be deemed to have a permanent establishment merely by the reason of

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display.

This would be an applicable exception to the arrangement between Overseas Co and the storage tanks owned by Australia Co because it is Australia Co that maintains Overseas Co’s commodities stored in the tanks.

The applicant asserts that the use of the facility involves the maintenance of stock of commodities for the purpose of storage in Australia, and as such falls under the exclusion provision under Article 4(4)(b) of the Overseas DTA.

When reading the Article, it must be borne in mind that there is a requirement to maintain the goods or merchandise belonging to the enterprise is solely for the purpose of storage or display.

In applying the facts of this case during the ruling period, it has been established that Australia Co may have been maintaining the commodities that belonged to the enterprise (Overseas Co) but for similar reasons given above, was not solely for the purpose of storage of the commodities. There was also the related purpose of facilitating commodity sales in the furtherance of the enterprise of Overseas Co.

Paragraph 4 of Article 4 of the Overseas DTA states:

An enterprise shall not be deemed to have a permanent establishment merely by the reason of

(f) maintenance of a fixed place of business solely for the purpose of activities which have a preparatory or auxiliary character for the enterprise, such as advertising, the supply of information or scientific research.

The applicant asserts that the use of the facility involves activities which are preparatory or auxiliary in nature so that Sales Co can market and sells the commodities to third party customers.

In applying the facts of the case during the ruling period, it has been established that although there were strong elements that the activities performed by Australia Co under the Storage Agreement had a preparatory or auxiliary character, it could not be said that the place of business was solely used for this purpose. This is because Australia Co also appeared to be facilitating commodity sales between Sales Co and Overseas Co so that these commodities can be on sold to third party customers.

Therefore, although Australia Co maintained the commodities owned by Overseas Co, it was for reasons that extended beyond the storage of commodities and the preparatory and auxiliary activities involved - that is, through the activities of Australia Co, the commodities were also being sold to Sales Co to on sell to third party customers.

Therefore, the exceptions listed under Article 4(4) have no application.

Question 4 Does Overseas Co prima facie have a deemed permanent establishment in Australia under Article 4(5)(b) of the Overseas DTA?

Summary

Under Article 4(5)(b), the facts suggest that it is reasonable to infer that Australia Co acting on behalf of Overseas Co by facilitating the sale of commodity to Sales Co in order to dispense this commodity to third party customers.

Detailed Reasoning

In Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338; 90 ATC 4714; (1990) 21 ATR 531, the High Court accepted that the OECD Commentaries may be referred to when interpreting tax treaties in accordance with Article 32 of the Vienna Convention (see paragraph 90 of Taxation Ruling TR 2001/13). Taxation Ruling TR 2001/13 at paragraphs 101 to 105 explains the Commissioner's view that the OECD Commentaries are relevant to interpreting Australia's tax treaties.

Article 4(5)(b) of the Overseas DTA provides that a permanent establishment will exist if the contracting state acting on behalf of an enterprise of the other contracting state and (b) there is maintained in the first-mentioned Contracting State a stock of goods or merchandise belonging to the enterprise from which he or she regularly fills orders on behalf of the enterprise;

Article 4(5) addresses the circumstances in which a person acting in one country on behalf of an enterprise of the other country (other than an independent agent that is covered under Article 4(6)).

This Article provides that an enterprise should be treated as having a permanent establishment in a Contracting State if there under certain conditions a person (which would include a resident company) is acting for the enterprise.

On behalf of an enterprise

In most part, Updated Model Convention has no application to the Overseas DTA, but phrases such as ‘’acting on behalf of” is a common term used in both the current Overseas DTA and the Updated Model Convention and therefore on this basis the Updated OECD Commentary can be used as guidance.

Paragraph 86 of the Commentary on Article 5 of the Updated OECD Commentary states that:

a person is acting in a Contracting State on behalf of an enterprise when that person involves the enterprise to a particular extent in business activities in the State concerned.

The essential requirement for a company such as Australia Co to be acting on behalf of Overseas Co is that the actions of Australia Co directly or indirectly affects the enterprise (Overseas Co).

From the facts provided, during the ruling period, Australia Co and Overseas Co had a Storage and Handling Agreement in which Australia Co provides storage and handling services in respect to the commodity that Overseas Co had imported on xx xxxx 20XX. During the ruling period, it could be argued that Australia Co had acted on behalf of Overseas Co by using the storage facility to enable the transfer of the commodity from Overseas Co to Sales Co during the occasions when Sales Co purchased this commodity from Overseas Co.

Referring back to paragraph 86 above, it can be inferred that the facilitating the transfer of commodity between Overseas Co and Australia Co, the enterprise would be directly affected by the transfer of this commodity because Australia Co’s actions enabled the sale of the commodity through Sales Co to the Australian market.

Dependent agent

It is also relevant when interpreting this Article that Overseas Co was the only customer of Australia Co during the ruling period. The storage agreement between Overseas Co and Australia Co gives the impression that Australia Co is independently carrying on its own business and charges a fee to Overseas Co to store its commodity during the ruling period.

As Australia Co’s only customer is in a superior position in the corporate group as well, this in itself leads to the view that a permanent t establishment exists. Article 4(7) provides:

(7) The fact that a company which is a resident of one of the Contracting States controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself (emphasis added) constitute either company a permanent establishment of the other.

From reading this Article, although Overseas Co is in a superior position in the corporate group this may have some influence on whether a permanent establishment exists, other factors will also have relevance in determining whether prima facie a permanent establishment exists or not.

Australia Co had a storage agreement with Overseas Co for the storage and handling of the commodity during the ruling period. From the facts provided, Overseas Co had on a number of occasions during the ruling period, sold this commodity from the storage tanks to Sales Co. Despite the applicant’s position that the commodity facilities are not at the disposal of Overseas Co, Australia Co would have little choice in facilitating the transfer of the commodity within the tanks between the Overseas Co and Sales Co. It is for this reason that Australia Co was dependent on Overseas Co and would likely have followed instructions from other parties in the corporate group to facilitate the sale of the commodity to Sales Co during the ruling period.

Regularly fills orders

Based on the facts provided, during the ruling period, a third party customer approaches Sales Co to purchase this commodity. Sales co then approaches Overseas Co to purchase this commodity from them. The commodity located at the storage tanks then has its ownership transferred to Sales Co. As mentioned above, these sales of this commodity between Sales Co and Overseas Co happened on a regular basis, and as a result of this, the commodity was dispensed by Australia Co to the third party customers of Sales Co on no less than 1020 occasions since xx xxxx 20XX.

There is limited discussion in the OECD commentary about what ‘regularly fills orders’ actually means. For the purposes of applying the Overseas DTA to the facts provided, it is more prudent to assume the ordinary meaning to the phrase ‘regularly fill s orders’ to mean orders are filled on a basis of Australia Co transferring this commodity to Sales Co as a normal part of Australia Co’s operations during the ruling period.

Given the facts of this case, goods were not manufactured but rather stored and transferred at the facility to fill orders for Sales Co’s third party customers. Australia Co on (likely) instructions from Overseas Co allowed Sales Co’s third party customers trucks access to the storage facility where Australia Co dispensed this commodity to their trucks. Consequently, we form the view that under the direction of Overseas Co, Australia Co regularly filled orders by transferring the commodity to Sales Co and dispensing this commodity for Sales Co to third party customers during the ruling period.

It is submitted that Australia Co facilitated the change of ownership of the commodity between Sales Co and Overseas Co on a regular basis during the ruling period. Although the storage agreement does not address the sale of this commodity from the facility, Australia Co, as owner and operator of the facility which houses the commodity would have been a key player in filling in the orders on behalf of the enterprise, Overseas Co.

The fact that during the ruling period, there is no storage agreement between Australia Co and Sales Co also strengthens the argument that Australia Co regularly fills orders on behalf of Overseas Co. This is because although the commodity is owned by Sales Co after it has purchased the commodity from Overseas Co, the only Storage Agreement in place was between Australia Co and Overseas Co.

In essence, Australia Co is being remunerated by Overseas Co for commodity being stored at the facility, and after this commodity is sold to Sales Co this commodity is no longer owned by Overseas Co. If Sales Co and Overseas Co were dealing on an arms- length basis, Overseas Co would not be paying the storage charges to Australia Co for Sales Co’s newly acquired commodity.

In light of this, Australia Co is acting on the behalf of Overseas Co because in addition to the storage of this commodity at the commodity facility, Australia Co facilitates the transfer of the ownership of the commodity from Overseas Co to Sales Co which in itself may be viewed as regularly filling purchase orders from Sales Co for Overseas Co’s commodity.

We agree that this is a bonded facility and there may be occasions that commodity has to be transferred within the facility in preparation for sale. But from the facts provided, it goes beyond a mere transfer of this commodity because this commodity was sold to Sales Co for the purposes of on selling the commodity to third parties. And also during the ruling period, this commodity was stored by Australia Co for the new commodity owner- Sales Co without a storage agreement being in place.

We submit that in line with the arguments outlined above, Australia Co was during the ruling period ‘filling in orders’ for Overseas Co when they facilitated commodity sales (via intra facility transfers) between Overseas Co and Sales Co and then storing Sales Co’s newly acquired commodity ready to be dispensed to the trucks of Sales Co’s third party customers.

Concluding remarks

Under Article 4(5)(b), it would appear that Australia Co is ‘acting on behalf’ of the enterprise Overseas Co rather than itself or Sales Co. This is because the act of ‘filling in orders’ of this commodity for a party who has no separate storage agreement (during the ruling period) is in our view acting on behalf of Overseas Co, whose commodity is sold to third parties with Sales Co acting as an interposed conduit.

Accordingly, a permanent establishment of Overseas Co is deemed to exist in Australia under Article 4(5) of the Overseas DTA.

Question 5 Does Article 4(6) of the Overseas DTA apply to exclude Overseas Co from having a prima facie deemed permanent establishment in Australia?

Summary

The exception clause under this article has not been satisfied and therefore a permanent establishment is still deemed to exist.

Detailed Reasoning

Article 4(6) of the Overseas DTA is an exception clause to Article 4(5) and provides that:

An enterprise of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because that enterprise carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, where such broker or agent is acting in the ordinary course of that person's business.

The fact that Overseas Co has a superior position in the corporate group to Australia Co which operates the commodity facility in Australia is not in itself determinative whether or not a permanent establishment exists. Paragraph 38.1 of the OECD Commentary states:

In relation to the test of legal dependence, it should be noted that the control which a parent company exercises over its subsidiary in its capacity as shareholder is not relevant in a consideration of the dependence or otherwise of the subsidiary in its capacity as an agent for the parent. This is consistent with the rule in paragraph 7 of Article 5.

The key factor that Australia Co would not satisfy the exception under Article 4(6) for independent agents and brokers is that despite the fact that the applicant asserts that Australia Co is carrying on its own enterprise, the independent status of Australia Co is compromised due to the fact that Australia Co during the ruling period, is wholly performing tasks for only one enterprise- Overseas Co.

Paragraph 38.6 of the Overseas DTA provides:

Another factor to be considered in determining independent status is the number of principals represented by the agent. Independent status is less likely if the activities of the agent are performed wholly or almost wholly on behalf of only one enterprise over the lifetime of the business or a long period of time. However, this fact is not by itself determinative.

Although Overseas Co being the only customer of Australia Co is not in itself determinative that Australia Co being an independent agent of Overseas Co the facts in this situation would lead to the conclusion that neither Australia Co or Sales Co are independent agents or brokers acting on behalf of Overseas Co . But on balance, Australia Co would follow instructions of Overseas Co to regularly fill orders by transferring the commodity to Sales Co. During the ruling period, Australia Co does not appear to have any choice but to transfer the commodity to Sales Co and to store this commodity without any formal storage agreement with Sales Co.

Accordingly, the exception rule for independent agents under Article 4(6) of the Overseas DTA has no application and therefore Overseas Co is still deemed to have a permanent establishment.