Edited version of private advice

Authorisation Number: 1052259972526

Date of advice: 13 June 2024

Ruling

Subject: Permanent establishments

Question

Does the Applicant have a permanent establishment in Australia within the meaning of Article 4 of the Agreement between the government of the commonwealth of Australia and the government of the republic of Country A for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (country A Agreement) as a result of the contracting company?

Answer

Yes.

This ruling applies for the following period:

XXX

The scheme commences on:

XXX

Relevant facts and circumstances

The Applicant

The Applicant is a company that was incorporated in a foreign country.

The Applicant does not have an office or any other business premise in Australia.

The Applicant's principal activity relates to the communication industry.

The Applicant has an employee who currently resides in the foreign country. This employee intends to resign from the Applicant and move to Australia to establish as an Australian incorporated company (the contracting company).

The ex-employee will be a director of the contracting company and will own all the shares either directly or indirectly in the contracting company.

The Applicant intends to appoint the contracting company to act as a sales representative agent under a Sales Representative Agreement (SRA).

The contracting company

As noted above, the contracting company will act as the Applicant's sales agent and sales representative.

The principal activity of the contracting company is to provide close support of the existing businesses of the foreign region including but not limited to contract negotiations, billing, technical support, etc.

A summary of the role of the contracting company is outlined below:

a.            The contracting company will be engaged to generate sales on behalf of the Applicant.

b.            The SRA will be commission based but will also include a base amount for services provided.

c.            The contracting company will have 1 person at the commencement of the arrangement but is not limited to 1 person. The contracting company will have the right to delegate any work to employees or external contractors.

d.            The contracting company will contact the Applicant's potential and existing customers, negotiate orders for the Applicant's services, attend meetings with customers, promote the Applicant's services during conferences, be the first point of contact for the Applicant's customers.

e.            The contracting company will not have the authority to sign contracts on behalf of the Applicant. The contracting company will negotiate pricing and put forth the commercial proposal to the Applicant. It will be executed by the Applicant only.

f.            Neither the contracting party nor its employees/contractors will have any authority to make decisions on behalf of the Applicant. Entering, changing or terminating any order for the Applicant service will require the Applicant's decision.

g.            The Applicant is the entity signing the agreement with a customer, in most cases the Applicant is the entity bearing the responsibility or risks for the results produced by the activities/services provided by the contracting company.

h.            The Applicant will have the relationship with the contracting company only; the contracting company will be responsible for supervising any employees or external contractors the contracting company may engage.

The contracting company's role will be to find sales opportunities for the Applicant evaluation, but the contracting party won't act on behalf of the Applicant in the sense that it won't sign any agreements/orders with the Applicant's customers.

Price negotiation process

The contracting company will identify business opportunities in the region. Once the opportunity is qualified, the contracting company will obtain the pricing for the services from the Applicant to commence the price negotiation process. Upon agreement by the prospect, commercial order form and the contract will be generated by the Applicant and the Applicant's authorised signatory will then sign off the contract.

The pricing approval comes from the Applicant's Pricing Desk that sits in a foreign country. Only upon approval can the contracting company make the offer to the customers.

Once pricing is agreed, the contracting party will download the order form the Applicant's system. The contracting company will send the order form directly to the customer and the customer will sign the order electronically.

The contract between the Applicant and the Applicant's customer will be considered formally concluded when the agreement/order form is signed by the customer.

The contract will be counter-signed by the respective authorised signatory of the respective the Applicant entity and will take place electronically.

Once the contract is signed, the Applicant's delivery team will take over and deliver the service (outside of Australia). The contracting company will be available for the Applicant customers in case of any questions in relation to the service.

The contracting company will receive compensation in the form of a monthly amount calculated based on the monthly Base Amount and Sales Targets.

Sales Representatives Agreement (SRA)

As noted above, the Applicant appoints the contracting company to act as a sales representative agent under a SRA. Clauses of the SRA will include:

a.            The Applicant has the right at all times to directly sell and promote the Products in the Region and to appoint any other persons to provide the Services in the Region, and the contracting company shall have no claim against the Applicant or any of its Affiliates in this respect.

b.            Given the fact that the contracting company will devote such substantial time as it determines is necessary to fulfil the Services and will acquire or have access to information which is of a highly confidential and secret nature, the contracting company undertook not to perform during the term of this Agreement any services for any other person or firm without the Applicant's prior written approval nor to provide the Services outside the Region unless expressly allowed to do so in writing by the Applicant.

c.            The contracting company shall have no authority to sign any letter, agreement, document or instrument, or otherwise to act in the name of, or as agent for or, partner or joint venturer of the Applicant or otherwise contractually to bind the Applicant, in dealings with any third party, except only to the limited extent, if any, that the contracting company may hereafter be specifically authorized in a separate written instrument to negotiate on behalf of the Applicant. Notwithstanding the above, the contracting company may during the term of this Agreement, represent itself as advisor to the Applicant and may represent the Applicant's interests and point of view in meetings with third parties and negotiate special pricing for customers while noting that the contracting company shall not make any representation to any third party to believe that he has authority to act on behalf of the Applicant.

d.            The Applicant retains the final decision and responsibility of all decisions pertaining to the customers relations and to the promotion and sales of the Products including but not limited to the negotiation and approval of any final deal with the customer and the determination of the purchase prices, applicable discounts and other specifications. Any comment, proposal or advice issued by the contracting company regarding the provision of the Services shall be considered as a suggestion to the Applicant only and not an instruction. The contracting company retains the right to inspect, stop, or suspend the Services of the contracting company, in case it deems at its own discretion that it is necessary to do so to protect the rights and interests of the Applicant.

e.            The contracting company shall not, during the term of this Agreement directly or indirectly, through services to any partnership of which Company is a partner or through any corporation or other entity in which the contracting company has any interest or by whom is employed or contracted, compete with the Applicant or any of its affiliates in the Region in any activity in which the Applicant or its affiliates are engaged or have any business dealings whatsoever with any customer or client of the Applicant or its subsidiaries or any person or firm with whom the Company has made contact in connection with the Services provided to the Applicant.

f.            The Applicant shall pay to the contracting company a monthly amount calculated based on the monthly Base Amount and Sales Targets.

g.            The contracting company shall issue an invoice to the Applicant for the amounts of Compensation every month, and the Applicant shall settle said amounts within a period of two (2) weeks.

The SRA outlines the following scope of services:

a.            The Services:

               i.      Market and sell the Applicant's services generating revenues and margin in accordance with Sales Targets. The contracting company undertakes to reach the sales targets and ensure the alignment with the Applicant's strategy and policies;

               ii.      Manage and develop existing accounts within the Region; and

               iii.      Develop new business within the Region.

b.            The contracting company's main key responsibilities shall include:

               i.      Ensure that all sales administration associated with the Applicant's customers is maintained to ensure that the implementation of orders and customer queries can be dealt with smoothly and efficiently;

               ii.      Extend customers' understanding of the Applicant's Products and services and build relations with the Applicant's key clients (existing & new) in order to grow sales and establish and/or maintain continued market leadership;

               iii.      Build professional and credible customer relationships in order to add value and lead to long term profitable relationships and expansion of the Applicant's business in the Region;

               iv.      Work closely with the sales and products departments of the Applicant in order to increase the Applicant's market share within the clients and mobile operators and as appropriate, work in coordination with other company's account managers world-wide to develop and establish a solid market approach to the Applicant in the Region;

               v.      Leverage where possible synergies with the Applicant's affiliates, subsidiaries and group of companies;

               vi.     Take all efforts aimed at the creation of a positive attitude to the Applicant and its attractive image within the telecommunications industry and community;

               vii.      At the Applicant's request, participate in all customers' events, including seminars, trade fairs and presentations.

c.             Delegation of Authority:

               i.      The contracting company shall have the right to negotiate and execute special Pricing for customers provided that the Applicant has pre-approved any such special Pricing.

               ii.      Any final approval of a contract with a customer and the authority to sign such contracts remains with the Applicant's Sales Director.

               iii.      The contracting company has no authority to sign any documents on behalf of the Applicant unless expressly allowed to do so in writing.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 6

International Tax Agreements Act 1953 section 7

The Convention Article 5

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Section 7 of the International Tax Agreements Act 1953 (Agreements Act) gives the Country A Agreement the force of law. Subsection 5(1) of the Agreements Act gives the first amending protocol and second amending protocol the force of law.

In order to determine if a PE exist under Article 4 of the Country A Agreement, it is necessary to firstly determine whether the Country A Agreement applies to the Applicant.

The Applicant is a company that was incorporated in Country A. The Applicant is both a person and a Country A resident for the purposes of Article 1A of the Country A Agreement. As such, the Country A Agreement applies to the Applicant.

Fixed place of business

The term PE is defined in Article 4(1) of the Country A Agreement as 'a fixed place of business through which the business of the enterprise is wholly or partly carried on'.

Article 4(2) of the Country A Agreement (as amended by the first amending protocol) states that a 'permanent establishment' includes but is not limited to:

(a)          a place of management;

(b)          a branch;

(c)          an office;

(d)          a store or other sales outlet;

(e)          a factory;

(f)          a workshop;

(g)          a warehouse except where it is used solely for any of the purposes mentioned in paragraph (4);

(h)          a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; and

(i)          a building site, or a construction, installation or assembly project, but only where such site or project or any combination of them continues for a period aggregating more than 6 months within any 12-month period.

The Applicant's office is in Country A. The Applicant does not have a place of management, branch, office, store, factory, workshop, warehouse, mine or a building site in Australia. Accordingly, the Applicant does not have a fixed place of business Australian PE for the purposes of Article 4(1) of the Country A Agreement.

'Deemed' PE through an Agent

If a non-resident enterprise does not conduct activities itself through a fixed place of business in Australia, it may still be 'deemed' to carry on business through a PE such as through an agent ('Dependent Agent PE').

Relevantly, Article 4(5) of the Country A Agreement ('Dependent Agent Article') provides that a that a person acting in one Contracting State on behalf of an enterprise of the other contracting state is deemed to be a PE of that enterprise if that person has, and habitually exercises, in a State, an authority to conclude contracts on behalf of the enterprise (emphasis added).

Article 4(6) of the Country A Agreement ('Independent Agent Article') provides that an enterprise of one of the Contracting State shall not be deemed to have a PE in 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 (emphasis added).

In applying Article 4 it is necessary to first consider whether the contracting company has authority to conclude contracts on behalf of the Applicant and that that authority is habitually exercised (Article 4(5) of the Country A Agreement).

If that authority exists and is habitually exercised, it is then necessary to consider whether the contracting company is an independent agent (Article 4(6) of the Country A Agreement).

OECD Commentaries

Taxation Ruling TR 2001/13 - Interpreting Australia's Double Tax Agreements (TR 2001/13) sets out the Commissioner's view on interpreting Australia's double tax agreements. Paragraph 104 of TR 2001/13 provides that:

The Commentaries, with the various Observations and Reservations of OECD member countries which they reproduce...provide important guidance on interpretation and application of the OECD Model and as a matter of practice will often need to be considered in interpretation of DTAs, at least where the wording is ambiguous, which...is inherently more likely in treaties than in general domestic legislation.

Given the Article 4 definition of PE was updated by the first amending protocol in 1990 with reference to Article 5 of the Model Double Taxation Convention on Income and on Capital 1977 (1977 OECD Model Convention), the associated Commentaries provide useful interpretive guidance.

Authority to conclude contracts

Paragraph 32 of the commentary on Article 5 of the 1977 OECD Model Convention states:

The authority to conclude contracts must cover contracts relating to operations which constitute the business proper of the enterprise. It would be irrelevant, for instance, if the person had authority to engage employees for the enterprise to assist that person's activity or the enterprise or if the person were authorised to conclude, in the name of the enterprise, similar contracts relating to internal operations only.

Paragraphs 87 and 88 of the commentary on Article 5 of the 2017 OECD Model Convention provide the following in respect of the meaning of 'conclude contracts' (emphasis added):

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 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 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.

In relation to the concluding contracts test, Vogel (1997) says, that the treaty test of "authority to conclude contracts" is not looking only at the private laws of each of the jurisdictions. Rather, because treaties are intended to apply in both civil and common law jurisdictions, it is the substance of the parties' conduct that is important:

......... The question whether such a person has an authority to conclude contracts within the meaning of the treaty law must be decided not only with reference to private law but must also take into consideration the actual behaviour of the contracting parties. An approach relying solely on aspects of private law (the law of contracts) would make it easily possible to prevent an agent from being deemed a permanent establishment (and, therefore, to prevent the enterprise from being taxed by the State in question) even where he is engaged most intensively in the enterprise's business: he would be allowed only to negotiate contracts up to the point when they were finalised and ready to be signed, but the final signature, to satisfy the proprieties, would be reserved to someone from the enterprise's headquarters in the other contracting State. ... It is submitted that the solution is even simpler, since the agent had in fact an authority to conclude contracts, even if not under private law (the law of contracts), but at all events within the meaning of underlying Art. 5. In other words, decisive for Art. 5(5) is the substance of the authorization, not its form... 22 (emphasis added)

Vogel's text was revised in 2015. Relevantly, paragraphs [329-331] provide as follows:

...... As a rule, it is sufficient that the principal accepts and acknowledges the results of the actions taken, and contracts negotiated by the agent. Considering a high degree of arbitrariness if the merely formal act of finally signing a contract were decisive, we propose a substance-overform approach with regard to the authority to conclude contacts test: if it belongs to the typical activities of the agent to communicate with the third party and to discuss and arrange (spontaneously or after the agent has sought the consent of the principal) the main features of the contract, it is immaterial if the final signature is made by the agent on behalf of the principal, or by the principal himself. It is required, however, that the principal will follow the arrangements of the agent in the overwhelming majority of cases. According to this yardstick, a recent decision of the Dutch Court of Appeal of The Hague deserves full approval. (Gerechtshof's-Gravenhage, case BK-07/00604 of 15 Jul.2008)23

Vogel's "Klaus Vogel on Double Taxation Conventions" (1997) is an authoritative work which has been cited with approval in some of Australia's treaty cases24 (see judgments by Gzell J in Unisys Corporation v Commissioner of Taxation [2002] NSWSC 1115 at [67] and Logan J in Russell v Federal Commissioner of Taxation [2009] FCA 1224 at [132-134]) as well as tax cases in other European jurisdictions25.

Habitually exercised

As outlined above, the mere authority to conclude contracts on behalf of an enterprise is not sufficient on its own to constitute a dependent agent PE. The authority must actually be performed by the agent and exercised habitually.

Paragraph 98 of the commentary on Article 5 of the 2017 OECD Model Convention states:

The requirement that an agent must "habitually" exercise an authority to conclude contracts reflects the underlying principle in Article 5 that the presence which an enterprise maintains in a Contracting State should be more than merely transitory if the enterprise is to be regarding as maintaining a permanent establishment, and thus a taxable presence, in that State. The extent and frequency of activity necessary to conclude that the agent is "habitually" concluding contracts or playing the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise will depend on the nature of the contracts and the business of the principal. It is not possible to lay down a precise frequency test.

In Unisys Corporation Inc V FC of T [2002] NSWSC 1115, the NSW Supreme Court considered whether a USA Corporation had a PE in Australia.

Gzell J held that the existence of a general authority to conclude contracts was not sufficient to constitute a PE. In this case, the only contracts executed that constituted the business activity were a licence and sub-licence agreement in relation to intellectual property. There was not a sufficient repetition of contractual activity to constitute the habitual exercise of a general authority to conclude contracts.

Relevantly, paragraph 67 of the judgment states (emphasis added):

Klaus Vogel on Double Taxation Conventions, 3rd ed, Kluwer, London, 1997 at 332-333, points out that the mere existence of an authority to conclude contracts does not signify that the person so authorised is actually engaged in business in a way that would justify the agent being taxed. An additional requirement is that his activities have a certain permanence that is why, Professor Vogel says, there is the additional requirement in the OECD models that the authority to conclude contracts must be exercised habitually. The frequency with which the agent concludes contracts will be sufficient if it corresponds to what is normal in the actual line of business concerned. Professor Vogel says that in cases of doubt, the continuity of such a person's exercise of authority should be measured by application of the same criteria as those applied under the general permanent establishment concept laid down in art 5(1). The decisive factor in this case is whether the activity was, from the outset, devised for a lengthy period or only as a temporary expedient. He points to a decision of the Norwegian Høyesterett in which an agent who merely extended a contract on three successive occasions, was held not to have habitually exercised that authority.

Application

Authority to conclude contracts

As stated above, paragraph 87 of the commentary on Article 5 of the 2017 OECD Model Convention provides that a contract may be concluded in a State even if that contract is signed outside the State. 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 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.

In addition, 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.

In light of the facts and circumstances described in this ruling, the Commissioner considers that it is reasonable to conclude that the activities and actions to be performed by the contracting company constitute negotiation of all elements of the contract(s) such that the role of the contracting company is to conclude contracts in a way binding on the Applicant. The Commissioner considers this to be the case even if approval and review including ultimate execution (signing of the contract) is to be undertaken by the Applicant. There is currently no indication that the Applicant will modify key components of a contract as part of the above process. The contracting company performs activities that constitutes an integral part of the business of the Applicant. The principal role leading to the conclusion of the contract will therefore be associated with the actions of the contracting company convincing the Applicant's customers to enter into a contract with the Applicant.

The facts and circumstances (although not exclusively) supporting the above conclusion are outlined below. These facts and circumstances are drawn from the SRA and as advised by the Applicant.

•         The contracting company will be engaged to generate sales on behalf of the Applicant.

•         The contracting company will have the right to negotiate and execute special pricing for customers provided that the Applicant has pre-approved any such special pricing.

•         The contracting company will contact the Applicant's potential and existing customers, negotiate orders for the Applicant's services, attend meetings with customers, promote the Applicant services during conferences, be the first point of contact for the Applicant's customers in relation to the Applicant's services they currently use or want to order.

•         The contracting company will negotiate pricing and put forth the commercial proposal to the Applicant.

•         The contracting company will identify business opportunities in the region. Once the opportunity is qualified, the contracting company will obtain the pricing for the services from the Applicant to commence the price negotiation process.

•         The contracting company will send the order form directly to the customer and the customer will sign the order electronically.

•         The contracting company will be available for the Applicant's customers in case of any questions in relation to the service.

•         The contracting company will ensure that all sales administration associated with the Applicant's customers is maintained to ensure that the implementation of orders and customer queries can be dealt with smoothly and efficiently.

•         The contracting company will extend customers' understanding of the Applicant's Products and services and build relations with the Applicant's key clients (existing & new) in order to grow sales and establish and/or maintain continued market leadership.

•         The contracting company will build professional and credible customer relationships in order to add value and lead to long term profitable relationships and expansion of the Applicant's business in the Region.

•         The contracting company will work closely with the sales and products departments of the Applicant in order to increase the Applicant's market share within the clients and mobile operators and as appropriate, work in coordination with other Company's account managers world-wide to develop and establish a solid market approach to the Applicant in the Region.

•         The contracting company will leverage where possible synergies with the Applicant's affiliates, subsidiaries and group of companies.

•         At the Applicant's request, participate in all customers' events, including seminars, trade fairs and presentations.

•         The contracting company promotes and markets the products to customers and is given authority to negotiate contracts on behalf of the Applicant, in return for a commission on the sales concluded through the contracting company's efforts.

•         The contracting company has expertise in the Applicant's business and products.

•         The contracting company will market and sell the Applicant's data services generating revenues and margin in accordance with sales targets. The contracting company will undertake to reach the sales targets and ensure the alignment with the Applicant's strategy and policies. The contracting company will manage, develop existing accounts and new business within the region.

It is also considered that the scope of the contracting company's authority under the SRA is sufficiently extensive to involve the Applicant in business activities in Australia for the following reasons:

The contracting company's services performed under the SRA equates to business of the Applicant actually performed by the contracting company through its place of business in Australia.

The contracting company's authority to conclude contracts under the SRA covers contracts relating to operations which constitute the business proper of the Applicant.

The contracting company's performance under the SRA has the requisite degree of permanence. In this regard, although the SRA may be terminated by any party, it is noted that there is nothing in the SRA between the Applicant and the contracting company that indicate that the contracting company's appointment serves as a temporary measure or a termination date.

In view of the responsibilities assumed by the contracting company as the Australian sales representative agent for the Applicant under the SRA, it is reasonable to conclude that the contracting company would conclude contracts with a level of frequency that is normal in sales agent business.

The contracting company carries out additional activities on behalf of the Applicant on top of just identifying and sourcing customers, which includes promoting the business and negotiating special pricing.

Habitually exercised

As outlined above, the mere authority to conclude contracts on behalf of an enterprise is not sufficient on its own to constitute a dependent agent PE. The authority must actually be performed by the agent and exercised habitually.

As per paragraph 98 of the commentary on Article 5 of the 2017 OECD Model, the extent and frequency of activity necessary to conclude that the agent is "habitually" concluding contracts or playing the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise will depend on the nature of the contracts and the business of the principal.

The SRA states:

•         The Applicant shall pay to the Company a monthly amount calculated based on the monthly Base Amount and Sales Targets achieved by the Company...

•         The Company shall issue an invoice to the Applicant for the amounts of Compensation every month, and the Applicant shall settle said amounts within a period of two (2) weeks.

It was also stated in the SRA that the contracting company will devote substantial time to fulfil services for the Applicant.

The contracting company will market and sell the Applicant's Data services generating revenues and margin in accordance with Sales Targets set out in the SRA. The contracting company undertakes to reach the sales targets.

The nature of the contracts relates to data services within the telecommunications industry.

Based on the above, it is the Commissioners view that the contracting company will undertake activities on a regular and frequent basis such that the contracting company is habitually exercising an authority to conclude contracts on behalf of the Applicant.

Independent Agent

Article 4(6) of the Country A Agreement states:

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 Commissioner's view in paragraphs 101 to 105 of Taxation Ruling TR 2001/13 is that, when interpreting a tax treaty recourse must be had to the Commentary on the OECD Model Tax Convention on Income and on Capital ('OECD Commentary') as a supplementary means of interpretation.

The OECD Commentary on the independent agent's article, as it read on 15 July 2014, provides at paragraph 37 that a person will come within the scope of the independent agents article, i.e. the person will not constitute a PE of the enterprise on whose behalf he acts, only if:

a)            he is independent of the enterprise both legally and economically, and

b)            he acts in the ordinary course of his business when acting on behalf of the enterprise.

a)            Independence

Whether a person is independent of the enterprise represented depends on the extent of the obligations which this person has vis-à-vis the enterprise.

The OECD Commentary notes the following characteristics of 'independence':

•         Independence is determined by consideration of the extent to which the agent exercises freedom in the conduct of business on behalf of the principal within the scope of the authority conferred by the agreement.

•         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 or comprehensive control by the principal as to the conduct of the work.

•         Although not determinative by itself, 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.

•         The provision of substantial information is not in itself a sufficient criterion for determination that the agent is dependent unless the information is provided in the course of seeking approval from the principal for the manner in which the business is to be conducted.

The chapter 'Regarding Article 5(6)' in Klaus Vogel on Double Taxation Conventions Third Edition 1997 contains an explanation of the concept of 'independence' at paragraphs 169 -171which includes:

•         An agent's personal independence may also be questioned if the agent, while retaining his independent status in legal respects, were to work for only one principal and were, therefore, to be economically dependent on the principal. It is common in such situations that, an agent is bound, though not legally, but at any rate factually - to obey his principal's instructions to the same degree as an employee and consequently to be regarded as a dependent agent.

•         If an agent is found to be dependent in the above sense, there is no point, regardless of his position as an independent entrepreneur or self-employed person under private law, in examining whether he is acting in the ordinary course of his business when working for the enterprise he represents.

Is the contracting company independent of the Applicant both legally and economically?

In relation to the Commissioner's consideration as to whether the contracting company is 'independent' the following is considered to be of significance:

•         The SRA states that given the fact that Company will devote such substantial time as it determines is necessary to fulfil the Services and will acquire or have access to information which is of a highly confidential and secret nature, the Company undertook not to perform during the term of this Agreement any services for any other person or firm without the Applicant's prior written approval nor to provide the Services outside the Region unless expressly allowed to do so in writing by the Applicant.

In this regard, as noted above, the OECD Commentary provides that:

'Although not determinative by itself, 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'.

The Commissioner considers that it is reasonable to conclude that the contracting company will wholly or almost wholly (recognising that there may be instances with approval to perform services for others) perform it activities on behalf of only one enterprise (the Applicant) for a long period of time (during the term of the SRA) and therefore this indicates that the contracting company is not 'independent'.

The Commissioner also considers the following factors (although not exclusively) to be relevant in considering whether the contracting company is 'independent' -

•         The contracting company will negotiate pricing and put forth the commercial proposal to the Applicant.

•         The contracting company will identify business opportunities in the region. Once the opportunity is qualified, the contracting company will obtain the pricing for the services from the Applicant to commence the price negotiation process.

•         The pricing approval comes from the Applicant's Pricing Desk that sits in Europe. Only upon approval can the contracting company make the offer to the customers.

•         The contracting company will work closely with the sales and products departments of the Applicant in order to increase the Applicant's market share within the clients and mobile operators and as appropriate, work in coordination with other Company's account managers world-wide to develop and establish a solid market approach to the Applicant in the Region.

Therefore, the relationship between the contracting company and the Applicant based on the facts and circumstances can be best summarised as follows:

•         The contracting company is economically dependent on the Applicant as it will wholly or almost wholly perform activities for the Applicant. The contracting company will be acting for the Applicant exclusively and not perform any other services for any other person or firm during the course of its business without the Applicant's approval.

•         The Applicant exercises control with respect to the manner in which the contracting company carries on its work.

Accordingly, the Commissioner considers it reasonable to conclude that the contracting company is not independent of the Applicant.

b)            Ordinary course of business

The question of whether the contracting company is providing services to the Applicant in the 'ordinary course of its business' needs to be explored only if the contracting company is legally and economically independent of the Applicant. This discussion is not relevant in light of the finding that the contracting company is an exclusive agent of and therefore economically dependent on the Applicant.

Therefore, the contracting company is not excluded from having a PE due to the operation Article 4(6) of the Singapore Agreement ('Independent Agent Article').

Conclusion

In conclusion, it is considered that for the purposes of Article 4(5) of the Country A Agreement, the Applicant has a deemed Australian PE by virtue of its business carried on in Australia through the contracting company, a dependent agent who has authority to conclude contracts on behalf of the Applicant and will habitually exercise that authority in Australia.