ATO ID 2009/158: Application of Article 4(5)(d) of the Australia: Japan tax treaty - permanent establishment in Singapore of a Japanese resident company
Date of decision: 2 October 2009
Year of income: Year ended 30 June 2010 Year ended 30 June 2011 Year ended 30 June 2012 Year ended 30 June 2013
Business line: Public Groups and International

Issue
Is a permanent establishment in Singapore of the taxpayer, a Japanese resident company, an 'entity' for the purposes of subparagraph (d)(i) of Article 4(5) of the tax treaty between Australia and Japan contained in Schedule 6 to the International Tax Agreements Act 1953 (the 2008 Japanese Convention)?

Decision
No. The taxpayer's permanent establishment is not an entity for the purposes of subparagraph (d)(i) of Article 4(5) of the 2008 Japanese Convention.

Facts
The taxpayer is a company that is a resident of Japan for the purposes of the laws of Japan and the 2008 Japanese Convention. The taxpayer also conducts an enterprise through a permanent establishment in Singapore. The taxpayer entered into an arrangement with an Australian resident company through its enterprise at the permanent establishment in Singapore. The enterprise conducted at the permanent establishment derives income, profits or gains from this arrangement after 1 July 2009.

Reasons for decision
Summary: Paragraph (d) of Article 4(5) provides that, for the purposes of the 2008 Japanese Convention, an item of income, profits or gains derived from a Contracting State through an entity that is organised in a state other than the Contracting States and is treated as income, profits or gains of the entity under the laws of the other Contracting State will not be eligible for the benefits of the treaty. In the present case, Australia is the country referred to as the 'Contracting State' and Japan 'the other Contracting State' in paragraph (d) of Article 4(5). The term 'entity' is not defined in the 2008 Japanese Convention. Article 3(2) of the 2008 Japanese Convention provides that, unless the context requires otherwise, any term not defined in the 2008 Japanese Convention shall have the domestic law meaning at that time under the law of the Contracting State applying that tax treaty, with a meaning under domestic tax law prevailing over a meaning of a term under other law. The definition of the term 'entity' in section 960-100 of the Income Tax Assessment Act 1997 (ITAA 1997) is not a meaning of that term that can be adopted in the 2008 Japanese Convention as the context in which the term is used in Article 4(5) of the 2008 Japanese Convention requires otherwise. Even though the term is defined in Australia's tax laws and used numerous times in tax and other Australian law, the definition of the term in section 960-100 of the ITAA 1997 and the meaning of the term in other Australian laws reflects an Australian domestic tax or other law setting and excludes what could be an 'entity' under Japanese law. For the purposes of the present case only and paragraph (d) of Article 4(5) in particular, the Commissioner considers that the term 'entity' refers to the structures or organisations used in Australia and Japan to conduct an enterprise or business. A permanent establishment has, for the purposes of the 2008 Japanese Convention, the meaning set out in the Permanent Establishment Article (Article 5) of that tax treaty. Under Article 5(1), a permanent establishment means 'a fixed place of business through which the business of the enterprise is wholly or partly carried on'. Taxation Ruling TR 2001/13 provides the Commissioner's views on interpreting tax treaties. Paragraph 104 of TR 2001/13 provides that the 'OECD Model Tax Convention on Income and on Capital' and its associated Commentary will often need to be considered in interpreting tax treaties. While the other parts of Article 5 of the 2008 Japanese Convention provide additional examples or specifications on what is or is not a permanent establishment, paragraph 2 of the Commentary on Article 5 of the OECD Model, upon which Article 5(1) of the 2008 Japanese Convention is based, states: Paragraph 1 gives a general definition of the term "permanent establishment" which brings out the essential characteristics of a permanent establishment in the sense of the Convention, a distinct "situs", a "fixed place of business". In applying this meaning of permanent establishment in the present case, the Commissioner considers that the permanent establishment in Singapore of the taxpayer is merely the fixed place at which the enterprise conducted by the taxpayer carries on its business in whole or in part. In light of this meaning, the question arises as to whether the enterprise conducted by the taxpayer is the entity for the purposes of paragraph (d) of Article 4(5) of the 2008 Japanese Convention. In Thiel v. Federal Commissioner of Taxation 90 ATC 4717, the majority judgment of Mason C.J., Brennan and Gaudron JJ stated in relation to the first sentence of paragraph 4 of the Commentary on Article 3 of the OECD Model Tax Convention on Income and on Capital (OECD Model) that:: This statement plainly recognises that an activity, as well as a framework within which activities are engaged in, may constitute an ''enterprise'' for the purposes of the Agreement. Moreover, we agree with Sheppard J. in thinking that an enterprise "may consist of an activity or activities and be comprised of one or more transactions provided they were entered into for business or commercial purposes'': (1988) 21 F.C.R. 122 at p. 146. Article 7, especially the heading ''Business Profits'', supports the notion that one or more transactions entered into for business or commercial purposes is an enterprise for the purposes of the Agreement. Because there are differences in the meaning of permanent establishment in the 2008 Japanese Convention compared with the meaning of 'entity' stated above, the Commissioner considers that the permanent establishment in Singapore is not of itself an entity for the purposes of paragraph (d) of Article 4(5). The same applies in respect of the enterprise the taxpayer conducts, whether the activities performed in Singapore are so performed within the enterprise or constitute the enterprise itself (see paragraph 4 of the Commentary on Article 3 of the OECD Model). In the present case, the Commissioner considers that the entity for purposes of paragraph (d) of Article 4(5) is the taxpayer, the Japanese resident company.

Legislative references: International Tax Agreements Act 1953 Schedule 6 - Article 3 Schedule 6 - Article 4 Schedule 6 - Article 5
Case references: Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338 (1990) 90 ATC 4717 (1990) 21 ATR 531
Related public rulings and determinations: TR 2001/13
Other references: OECD Model Tax Convention on Income and on Capital Condensed Version, 17 July 2008
Subject references: Double tax agreements International law International tax Japan Permanent establishment Treaties