Private ruling: International
Published: April 2013
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2012

Ruling: Q1: 1. Do you have a permanent establishment in Australia? | A2: No.

Relevant facts and circumstances: X is a distributor of products in the Australian market. The majority of stock distributed by X is sourced from international suppliers. For many years, X has been supplying a product which was being supplied by an international company. You, the manufacturer of the product, recently terminated its distribution agreement with a company and have commenced supplying directly to customers, including X. Under the proposed distribution agreement, X will import stock directly from you, some of which will be on consignment. X will be the importer of record for customs purposes. X will be responsible for clearing the products through customs and is liable for all duty and GST. You will invoice X for consignment stock once X has disposed of that stock. X may also re-supply to you, who will export the stock for sale within a region. X will invoice you as a separate supply for the sale of the consignment stock in Australia which you export to your customers in the region. X is the entity that causes the goods to come to Australia and initiates the import by raising a purchase order with you. While some of the stock is supplied on consignment terms by you, the risks and rewards of ownership rest with X and X acts as principal in all respects. All stock, including consignment stock, arrives in a single container which holds both stock purchased for X to on-sell either locally or for export. You will export all goods acquired from X to your customers in the region. You do not have any form of physical presence in Australia and all transactions with your regional customers are concluded outside of Australia. You state that X is not an agent acting on behalf of you, nor does it have any authority to conclude contracts on behalf of yourself. You state that X does not manufacture or process goods or merchandise belonging to you in Australia. You are not registered, or required to be registered, for GST in Australia You are a resident of another country for tax purposes. You are a non-resident of Australia for tax purposes.

Relevant legislative provisions: International Tax Agreements Act 1953 Agreement between the Government of Australia and The Government of X for the Avoidance of Double Taxation - Articles 5, 8, 24

Reasons for decision: Detailed Reasoning - Permanent establishment: Article 8(1) of the double tax agreement (DTA) provides that the profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State, but only so much of them as is attributable to that permanent establishment. The question of whether a non-resident enterprise has a permanent establishment in Australia is a question of fact and degree, which must be determined by reference to the individual circumstances of each case. Article 5 of the DTA discusses the meaning of the term 'permanent establishment' for the purposes of the agreement. Under Article 5(1) of the DTA, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on, including: · a place of management · a branch · an office · a factory · a workshop Article 5(2) of the DTA states that an enterprise shall not be deemed to have a permanent establishment merely by reason of: · the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise · the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery · the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise. Under Article 5(5) of the DTA, a person acting in one of the Contracting States on behalf of an enterprise of the other Contracting State shall be deemed to be a permanent establishment of that enterprise in the first-mentioned State if: · that person has, and habitually exercises in that State, an authority to conclude contracts on behalf of the enterprise; or · in so acting, he manufactures or processes in that State for the enterprise goods or merchandise belonging to the enterprise. An enterprise of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State under Article 5(5) of the DTA merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status (Article 5(6) of the DTA). In this case, you do not have a place of management, a branch, an office, a factory or a workshop in Australia, and all transactions with your regional customers are concluded outside of Australia. In addition, X is not an agent for you, does not have the authority to conclude contracts on behalf of you and, does not manufacture or process goods or merchandise belonging to you in Australia. Accordingly, you do not have a permanent establishment in Australia for the purposes of the double tax agreement. | Detailed Reasoning - Australian sourced income: To work out how tax applies to income you receive from international transactions involving Australia, you must first work out if that income has an Australian or foreign source. This may depend on whether your country has a tax treaty with Australia. Foreign residents are taxed in Australia on Australian-source income. Income from goods or services sold into Australia from a treaty country will generally have a foreign-source unless business is carried on through a permanent establishment in Australia. Australia and the other country currently have a double tax agreement in place and are therefore treaty countries. Article 24(1) of the DTA explains that income or gains derived by a resident of one of the Contracting States which, under any one or more of Articles 7 to 9, 11 to 19 and Article 23 may be taxed in the other Contracting State, shall for the purposes of the taxation law of the other Contracting State be deemed to be income or gains from sources in the other Contracting State. In your case, you are a non-resident of Australia for tax purposes, and, while it appears from the information provided that you may derive some income from an Australian source, the fact remains that your business is not carried on through a permanent establishment in Australia as detailed in Article 8(1) of the DTA (and discussed above). Therefore, as your business is not carried on through a permanent establishment in Australia, Article 24(1) of the DTA will not apply to your situation to deem income derived by you to be sourced from Australia. Accordingly, you will not derive any Australian sourced income under the proposed distribution agreement.

2. Do you derive any Australian sourced income under the proposed distribution agreement?