Edited version of private advice

Authorisation Number: 1051769502322

Date of advice: 22 October 2020

Ruling

Subject: Permanent establishment

Question

Does ForeignCo have a permanent establishment in Australia under Article 5 of the Convention?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

1.    OzCo is a wholly owned subsidiary company of ForeignCo.

2.    ForeignCo is a company incorporated in Country X and a tax resident of Country X. ForeignCo is headquartered in Country X.

3.    OzCo and ForeignCo sell items through their Country X and Australian websites.

4.    OzCo was incorporated to make sales to Australian customers through the internet and to be able to have access to the Australian internet domain name.

5.    ForeignCo's principal activities are related to the sale, marketing and distribution of products in Australia and Country X.

6.    ForeignCo's products are primarily manufactured by third parties in Country Y and shipped to Australia.

7.    ForeignCo orders and pays for the products from third-party suppliers.

8.    The Supplier is a third-party warehouse and logistics supplier. ForeignCo pays the Supplier to store and distribute key line items to customers and distributes non-key line items to customers on ForeignCo's dispatch team's instructions.

9.    OzCo does not deal with the warehouse. The warehouse is only used for the storage and delivery of goods.

10.  ForeignCo's website's intellectual property, maintenance and ordering software are provided to OzCo.

11.  The ForeignCo's and OzCo's websites' servers are located in Country X, which are not at ForeignCo's disposal. The websites are on servers housed in a data centre provided by a third-party IT provider. There is no physical equipment in Australia. ForeignCo and OzCo cannot access these servers in Country X as it is a secure data centre which looks after many other businesses' data.

12.  The internet service provider (ISP)/website hosting provider does not have an agency relationship with OzCo or ForeignCo. The agreement is a standard supply of services agreement.

13.  Australian customers enter into contractual terms and conditions with OzCo through the OzCo website.

14.  Australian customers' orders are processed in Country X via ForeignCo's software.

15.  OzCo acts as the local importer and deliverer for customs clearance purposes.

16.  Australian customers' payments are paid via direct debit into an Australian bank account in OzCo's name.

17.  The customer service and back office administrative services are based in Country V and Country W, with a management team based in Country X.

18.  There are compliance officers employed in the Country W.

19.  There are no employees based in Australia.

20.  OzCo has two directors. One is an Australian tax resident and the other is a Country X resident. All board meetings are held in Country X.

21.  Prior to a company group restructure, Australian sales were attributed to and declared by OzCo in the financial years prior to the Ruling Period.

22.  Prior to the Ruling Period and the commencement of an Agency Agreement, discussed below, OzCo would take sales revenue and ForeignCo would charge for various services, including management, marketing, accounts and overheads.

23.  OzCo and ForeignCo will enter into a proposed unwritten, informal agency agreement (Agency Agreement). OzCo will be paid an agency fee for facilitating the use of OzCo website and bank account for the placing and collecting of customer orders, and acting as local importer and deliverer of goods to customers for customers clearance purposes. OzCo will remit customer payments to ForeignCo.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 6

International Tax Agreements Act 1953 subsection 3AAA(1)

International Tax Agreements Act 1953 subsection 5(1)

Convention Article 1

Convention Article 3

Convention Article 5

Convention Article 7

Reasons for decision

Summary

The OzCo website is not a fixed place of business at the disposal of ForeignCo. The servers on which the website operates are not located in Australia. The ISP/website host provider hosting the OzCo website does not cause ForeignCo to have a permanent establishment.

The warehouse, used by the Supplier, merely stores products to be delivered to customers.

The proposed Agency Agreement does not deem OzCo to be a dependent agent permanent establishment of ForeignCo.

Therefore, ForeignCo does not have a permanent establishment in Australia.

Detailed reasoning

In order to determine if a permanent establishment exists under Article 5 of the Convention, it is necessary to firstly determine whether the Convention applies to ForeignCo.

Convention - application to ForeignCo

Article 1 of the Convention applies to 'persons who are residents of one or both of the Contracting States. Therefore, ForeignCo must be considered both a 'person' and a 'resident of a Contracting State' for the Convention to apply.

Subparagraph 1(j) of Article 3 of the Convention defines 'person' to include:

... an individual, a trust, a partnership, a company and any other body of persons.

ForeignCo is a company incorporated in Country X, which is managed and controlled in Country X and is not considered an Australian company.

Accordingly, the Convention applies to ForeignCo as it meets the requirements of Article 1.

Convention - business profits

Article 7 of the Convention states that if an entity is operating through a permanent establishment, the profits of the enterprise may be taxed in that State but only so much of the profits that is attributable to that permanent establishment.

Convention - does a permanent establishment exist in Australia?

Article 5 of the Convention is relevant in relation to determining whether ForeignCo is operating through a permanent establishment in Australia. Article 5 provides the following:

1. For the purposes of this Convention, the term " permanent establishment " means a fixed place of business through which the business of the enterprise is wholly or partly carried on.

2. The term " permanent establishment " includes especially:

a) a place of management;

...

7. Notwithstanding the preceding provisions of this Article, the term " permanent establishment " shall be deemed not to include:

a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;

b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;

c) ...;

d) ...;

e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character;

f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs a) to e) of this paragraph,

provided that such activities are, in relation to the enterprise, of a preparatory or auxiliary character.

...

10. The fact that a company which is a resident of a Contracting State 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 constitute either company a permanent establishment of the other.

It is necessary to apply the above Article to determine whether the activities of OzCo cause a permanent establishment to exist for ForeignCo. The activities are:

¢The use of the OzCo website,

¢The use of the warehouse by the third-party Supplier, and

¢The proposed Agency Agreement.

OzCo website

Article 5 of the Convention firstly needs to be applied to the OzCo website. The following questions relevantly need to be considered:

¢Whether the OzCo website is a 'place of business'?

¢Whether it is 'at [ForeignCo's] disposal'?

Place of business

Article 5 of the Convention provides that a '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.

Article 3(3) of the Convention states that:

As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the laws of that State concerning the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.

As such, the definition of the term 'place of business' applying to a website in relation to establishing a permanent establishment in Australia shall be guided by the context of its use in the Convention or, without such context, by the laws of Australia for the purposes of taxation.

Tax Ruling TR 2001/13 Income Tax: Interpreting Australia's Double Tax Agreements (TR 2001/13) provides that:

72. The undefined terms provision of the General Definitions Article picks up the meaning that the relevant term has for the purposes of the domestic tax laws of the country applying the DTA 'unless the context otherwise requires'. This aspect of the General Definitions Article in Australia's DTAs is closely based on the corresponding OECD Model Convention provision. For the reasons dealt with at paragraphs 101 to 111 of this Ruling, it is therefore highly relevant to consider what the OECD Commentaries to that Model say about this provision.

ATO Interpretive Decision ATO ID 2011/13 Income Tax Interest withholding tax: interest arising in Australia paid to a New Zealand Limited Partnership - 'beneficially owned' (ATO ID 2011/13)provides guidance in relation to the use of relevant context for interpreting Australian tax treaties and is therefore instructive in considering the application of paragraph 1 of Article 5 of the Convention. It further provides guidance in relation to the definition of 'place of business'.

ATO ID 2011/13 states the following:

Relevant context for the purposes of interpreting an Australian tax treaty includes the Commentaries on the OECD Model Tax Convention on Income and on Capital (the OECD Commentary). Paragraph 104 of Taxation Ruling TR 2001/13 states that the OECD Commentary provides important guidance on interpretation and application of the OECD Model Tax Convention and will often need to be considered as a matter of practice, in interpreting tax treaties, at least where the wording is ambiguous.

Therefore, the term 'place of business' should be used in a purposive sense in light of the operation of the Convention.

The OECD Commentaries on the Model Tax Conventions (Commentaries) may be used to interpret the meaning of 'place of business'.

The Commentaries on Article 5 explain that:

10. 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 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 are otherwise at the disposal of the enterprise. A place of business may thus be constituted by a pitch in a market place, or by a certain permanently used area in a customs depot (e.g. for the storage of dutiable goods). 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.

Further, in relation to a website and its host servers, the Commentaries state the following:

123. 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 6 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.

124. 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.

ForeignCo's and OzCo's websites' servers are located in Country X, which are not at ForeignCo's disposal. The websites are on servers housed in a data centre provided by a third-party IT provider. There is no physical equipment in Australia. ForeignCo and OzCo cannot access these servers in Country X as it is a secure data centre which looks after many other businesses' data.

Therefore, as the website's servers for the OzCo website are not located in Australia, it is considered there is no fixed place of business that exists in Australia. Neither ForeignCo nor OzCo own the website server, nor are the servers at ForeignCo's disposal.

Whether an ISP creates a permanent establishment was further examined in Taxation Determination TD 2002/5 - Income tax: does a resident of a country with which Australia has a Tax Treaty, have a permanent establishment solely from the sale of trading stock through an internet website hosted by an Australian resident internet service provider?:

8. Where an ISP is only in the business of providing access to the internet it operates as a mere conduit for the business activities of the non-resident enterprise. The agreement with the ISP would not typically specify which server the website will be hosted on and the ISP may change the server used at their discretion. The space used for a specific website on the server of the ISP is not at the disposal of the entity that owns the website. Thus, the enterprise does not have a fixed place of business in Australia.

...

11. In most cases, an ISP will not constitute a permanent establishment by virtue of it being a dependent agent, because the ISP is not an agent of the enterprise and would lack the authority to conclude, and would not regularly conclude contracts on behalf of the non-resident enterprise. The website itself does not constitute a dependent agent as it is not a 'person' as defined in Australia's tax treaties. Furthermore, the ISP could constitute an independent agent acting in the ordinary course of their business if, amongst other things, they host websites for a number of different enterprises.

The ISP/website hosting provider does not have an agency relationship with OzCo or ForeignCo. The agreement is a standard supply of services agreement.

The ISP/website hosting provider that hosts the OzCo website is not an agent of ForeignCo (nor OzCo) and does not allow ForeignCo to determine the OzCo website servers' location.

Therefore the ISP hosting the OzCo website does not create a deemed dependent agent permanent establishment for ForeignCo, and the OzCo website is not considered a place of business.

At ForeignCo's disposal

Whether the OzCo website is at ForeignCo's disposal does not need to be considered further because, as stated above, the website does not operate any servers in Australia which constitute a fixed place of business.

Conclusion

The OzCo website does not meet the conditions of Article 5 of the Convention to cause ForeignCo to have a permanent establishment.

Use of a warehouse

As stated above, '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. The warehouse used to store goods in Australia could be considered a place of business.

ForeignCo orders and pays for the products from third-party suppliers. The Supplier is a third-party warehouse and logistics supplier. ForeignCo pays the Supplier to store and distribute key line items to customers and distributes non-key line items to customers on ForeignCo's dispatch team's instructions. OzCo does not deal with the warehouse. The warehouse is only used for the storage and delivery of goods.

The warehouse is not considered to be at OzCo's or ForeignCo's disposal because it is provided by their Supplier. OzCo does not deal with the warehouse due to it being used for distribution through the third-party Supplier.

Subparagraph 7(a) of Article 5 of the Convention applies such that a permanent establishment shall not exist because the use of the warehouse is solely for the purpose of storage and delivery of goods belonging to the enterprise.

Conclusion

The use of the warehouse does not meet the conditions of Article 5 of the Convention to cause ForeignCo to have a permanent establishment.

The proposed Agency Agreement

Article 5 of the Convention may apply in relation to the proposed Agency Agreement between OzCo and ForeignCo in terms of OzCo being ForeignCo's dependent agent under this arrangement. It is necessary to consider whether:

¢OzCo is acting on behalf of ForeignCo,

¢OzCo is an independent agent,

¢OzCo has authority to conclude contracts on behalf of ForeignCo, and

¢OzCo is limited to the purchase of goods or merchandise for ForeignCo.

OzCo acting on behalf of ForeignCo

OzCo by virtue of the website communicates the offer price and acceptance of the contractual terms of a sale with the customer.

The Agency Agreement will provide that OzCo will be paid an agency fee for facilitating the use of the OzCo website and the bank account used for the order placing and collecting of payments as well as for acting as the local importer for customs and deliverer of goods to customers. Delivery is organised through a third-party, the Supplier, following the ForeignCo dispatch team's instructions.

ForeignCo and OzCo have no employees in Australia.

Orders are made via the OzCo website using ForeignCo software, processed and dispatched in Country X.

OzCo is acting on behalf of the enterprise.

OzCo is not an independent agent

Paragraph 9 of Article 5 of the Convention states that:

An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a person who is a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business as such a broker or agent.

Paragraph 106 of the Commentaries on this Article states that:

An independent agent will typically be responsible to his principal for the results of his work but not subject to significant control with respect to the manner in which that work is carried out. He will not be subject to detailed instructions from the principal as to the conduct of the work. The fact that the principal is relying on the special skill and knowledge of the agent is an indication of independence.

OzCo will be considered an agent under the proposed Agency Agreement, not an employee.

OzCo is economically and operationally dependent on ForeignCo's website intellectual property, order placement software and distribution network in order to function. As stated above, OzCo has no employees and relies on ForeignCo staff to process customer orders.

Accordingly, OzCo is a dependent, not an independent agent, of ForeignCo.

OzCo has authority to conclude contracts

Paragraph 8 of Article 5 of the Convention states that:

Notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 9 applies - is acting on behalf of an enterprise and:

a) has, and habitually exercises, in a Contracting State an authority to substantially negotiate or conclude contracts on behalf of the enterprise; or

b) manufactures or processes in a Contracting State for the enterprise goods or merchandise belonging to the enterprise,

that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 7 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.

OzCo must habitually exercise the authority to conclude contracts on ForeignCo's behalf: Unisys Corporation Inc v Federal Commissioner of Taxation 2002 ATC 5146.

The term 'concludes contracts' in relation to establishing a permanent establishment in Australia shall be guided by the context of its use in the Convention or, without such context, by the laws of Australia for the purposes of taxation.

Therefore, the term 'concludes contracts' should be used in a purposive sense in light of the operation of the Convention.

The Commentaries provide the following in respect of the meaning of 'conclude contracts' (at paragraphs [87]-[88]):

The phrase "concludes contracts" focusses on situations where, under the relevant law governing contracts, a contract is considered to have been concluded by a person. A contract may be concluded without any active negotiation of the terms of that contract; this would be the case, for example, where the relevant law provides that a contract is concluded by reason of a person accepting, on behalf of an enterprise, the offer made by a third party to enter into a standard contract with that enterprise. Also, a contract may, under the relevant law, be concluded in a State even if that contract is signed outside that State; where, for example, the conclusion of a contract results from the acceptance, by a person acting on behalf of an enterprise, of an offer to enter into a contract made into by a third party, it does not matter that the contract is signed outside that State. In addition, a person who negotiates in a State all elements and details of a contract in a way binding on the enterprise can be said to conclude the contract in that State even if that contract is signed by another person outside that State.

...The phrase ["concludes contracts"] must be interpreted in the light of the object and purpose of paragraph 5, which is to cover cases where the activities that a person exercises in a State are intended to result in the regular conclusion of contracts to be performed by a foreign enterprise, i.e. where the person acts as the sales force of the enterprise. The principal role leading to the conclusion of the contract will therefore typically be associated with the actions of the person who convinced the third party to enter into a contract with the enterprise....where such principal role is performed in that State, the actions of that person will fall within the scope of paragraph 5 even if the contracts are not formally concluded in the State, for example, where the contracts are routinely subject, outside that State, to review and approval without such review resulting in a modification of key aspects of these contracts.

(emphasis added)

OzCo and ForeignCo have no sales staff operating in Australia. Customer contact centre staff are located in Country V and Country W, who are managed by a team based in Country X, with compliance officers also located in Country W.

Australian customers enter into contractual terms and conditions with OzCo through the OzCo website. ForeignCo's products are primarily manufactured by third parties in Country Y and shipped to Australia.

The website software and product ordering systems are ForeignCo's property. OzCo merely uses that software to facilitate the customer entering into a contract.

However, as stated above, the website is not tangible property and is not a person.

Staff processing these contracts are based in Country X. ForeignCo itself orders the goods to be supplied to customers, which the Supplier delivers.

Therefore, OzCo does not habitually conclude contracts on behalf of ForeignCo.

The activities are not limited to the purchase of goods or merchandise for ForeignCo

OzCo does not purchase goods or merchandise for ForeignCo. The customer places the order and ForeignCo's software and, where necessary, its staff process the order. ForeignCo orders, invoices and pays for products mainly manufactured in Country Y from the Supplier who transports and delivers them to Australia (with key line items being stored in a warehouse). OzCo acts only as a local importer and deliverer for customs clearance purposes. OzCo does not directly deal with the warehouse.

As stated above in paragraphs 7 and 8 of Article 5 of the Convention, the use of warehouse to store and deliver goods is excluded from being considered a permanent establishment.

OzCo's activities under the proposed Agency Agreement do not meet the conditions of Article 5 of the Convention to cause ForeignCo to have a permanent establishment.

Conclusion

Based on the above, ForeignCo does not have a permanent establishment in Australia under Article 5 of the Convention.