Private ruling: Residency
Published: January 2014
Ruling period: 30 June 2010, | 30 June 2011, | 30 June 2012, | 30 June 2013, | 30 June 2014, | 30 June 2015.
Date scheme commenced: 1 July 2009.

Ruling: Q1: Do you have a permanent establishment in Australia for the purpose of the Australia-Overseas Country Double Tax Agreement? And therefore be liable Australian income tax on the sale of its products to Australian resident retailers? | A1: No. | Q2: Do you have an obligation to lodge Australian income tax returns for the 2010-2013 income years and future income years while conducting the same business operations? | A2: No.

Relevant facts and circumstances: You are a foreign company incorporated in accordance with the laws of an Overseas Country. Your principal office is in an Overseas Country and conducts business under the trading name of X. You are a non-resident for Australian tax purposes. You are a resident of an Overseas Country for the purposes of its local taxation laws. You carry on a business of designing, producing, selling and exporting items. These items are exported from overseas to countries worldwide, including Australia. The designing and production takes place overseas. You do not have an office or other fixed place of business in Australia. You do not own, rent or otherwise have at your disposal premises in Australia from which you carry on business. Further, you do not have any employees' resident of, or located in, Australia for any length of time that would indicate a degree of permanence. You have an Australian subsidiary, "the Subsidiary" that was incorporated. The Subsidiary is an Australian resident for Australian taxation purposes and under the DTA. The Subsidiary carries on the following functions: (a) Sales and marketing agent for you, (b) Storage facility made available for you, (c) Retailer. The Subsidiary acts as a sales and marketing agent for you in Australia. The Subsidiary performs these services as an independent contractor in accordance with a commercial agreement. The most recent Agreement took effect from 2013. You have attached a copy of the Agreement. The previous agreement was on similar terms but was updated in relation to the payment of agent fees. A copy of this agreement is also attached. In accordance with the Agreement, the Subsidiary performs its services as an independent contractor to promote the sales of your selected products. This involves taking samples of the new range products to prospective retail purchasers for viewing and outlining prices. If a retailer wishes to purchase any products the retailer needs to place the order with you. In accordance with the Agreement, the process by which the sales are entered into between the retailer and you, involves the Subsidiary transmitting all offers or orders received to directly to you. In the majority of cases, this involves the purchase requests being undertaken by the retailer directly transmitting its orders to you via an online ordering system. In limited cases, the order may be provided by the retailer to the Subsidiary who then transmits the order through to you. The Subsidiary does not, and cannot accept any orders on behalf of you, but merely forwards the order for your consideration. Once an offer or order is received, you are then free to accept or reject the offer or order, within a specified period of time. The Subsidiary has no authority to make contracts on your behalf, or in any way to bind you. All retailers are direct clients of yours. The terms of this arrangement are prescribed in accordance with a Clause of the Agreement. Once an order is accepted, you fulfill the order by issuing the required invoice directly to the customer. You then contract a freight forwarder to deliver the goods to the retailer's premises. The product may be shipped from overseas or, where available, from your stock held in Australia. All payments of invoices are made directly to your bank account as prescribed by the invoice. The Subsidiary receives an agent's commission for the sales that it refers to you. You are the sole party that determines whether new customers are accepted or not, whether sale offers or orders are to be accepted, the product range that is to be offered in Australia and the payment terms of the orders. You directly receive all payments of invoices. Due to the large time difference between Australia and the Overseas Country, the Subsidiary also takes enquiries from Australian customers on your behalf as required. For a monthly fee, the Subsidiary provides you with a place for the storage of your goods in Australia. The goods that are stored in Australia remain in your ownership at all times until their sale to the retailer. The purpose of maintaining storage in Australia is to allow for quick delivery of the goods from you to your Australian customers. Once an order is received, you directly invoice the Australian customer and arrange for the delivery of goods from the stock stored in Australia (if available) directly to the customer. The Subsidiary assists in arranging the delivery of the goods only after it has been advised by you that a sale order has been accepted. Recently the Subsidiary has started operating as a retailer, opening a store in Australia. The store sells product directly to the public. The store is owned and managed by the Subsidiary with all costs of establishing and running the store being met by the Subsidiary. The Subsidiary purchases the stock for the store from you at the same prices as all other Australian retailers purchase their stock from you. Any profits that are derived from the store belong solely to the Subsidiary and are included in its Australian assessable income. You have no direct involvement in relation to the store.

Relevant legislative provisions: International Tax Agreements Act 1953 Section 4 | International Tax Agreements Act 1953 Section 5 | Income Tax Assessment Act 1936 | Income Tax Assessment Act 1997 In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements. | Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997) so that all three Acts are read as one. | The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country X agreement is listed in section 5 of the Agreements Act. | The agreement between Australia and Country X operates to avoid the double taxation of income received by residents of Australia and Country X. An article of the agreement defines the term Permanent Establishment (PE). as follows: | "for the purposes of this agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on." | Taxation Ruling TR 2001/13 at paragraphs 101 to 105 explains the Commissioner's view that the OECD Model Tax Convention and Commentaries are relevant to interpreting Australia's tax treaties. Paragraph 1 of the OECD Commentary on Article 5 of the OECD Model Tax Convention explains that the general definition of a PE contains the following conditions: | 1. the existence of a 'place of business', i.e. a facility such as premises or in certain instances, machinery or equipment; | 2. this place of business must be 'fixed', i.e. must be established at a distinct place with a certain degree of permanence; | 3. 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. | The Commentaries explain that a 'place of business' covers any premises, facilities or installations used for carrying on the business. It is also immaterial if a business is actually carried on in the premises and whether the premises is owned or rented. The important consideration is that the space must be at the disposal of the entity. | In your case, you have described your business as the "designing, producing, selling and exporting of goods" thus selling and exporting are essential elements of the carrying on your business. In order to carry on this element of your business you have at your disposal a rented place of storage. This location has been rented continuously for this purpose and is a fixed location. You are dependent on this location in order to get your jewellery to your customers (and retail store) in a timely manner. | The Article further illustrates the general definition by providing listed facilities that are included in the definition: | "(a) a place of management; | (b) a branch; | (c) an office; | (d) a factory; | (e) a workshop; | (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; | (g) an agricultural, pastoral or forestry property; | (h) a building site or construction, installation or assembly project which lasts for more than twelve months." | The Commentaries at paragraph 2 note that the list is not exhaustive and should only be considered in light of paragraph 1. | Another part of the article of the Country X Agreement outlines scenarios where an entity will not have a PE because its goods or merchandise: | · Are stored, displayed or kept in a facility for delivery purposes, | · Are maintained for storage, display or delivery purposes, | · Are maintained for processed by another enterprise. | Neither will an PE be presumed where a fixed place of business is: | · Maintained for purchasing goods or merchandise or for collecting information, | · Maintained for the purposes of performing activities which have a preparatory or auxiliary character, such as advertising or scientific research. | The Commentaries note in paragraph 4 that it can be difficult to determine whether the activities of the entity are preparatory or auxiliary in character. Do the activities of the fixed place of business constitute an essential and significant part of the activities of the enterprise as a whole? This question should be addressed on a case by case basis. | In your case, although you have a place in Australia at your disposal which forms an important element of your business, it is used solely for the purpose of storing and delivery purposes. | The Country X Agreement specifies that where a person acting on behalf of the entity (other than an independent agent), shall be deemed to be a PE of that entity if: | · they recurrently exercise an authority to conclude contracts on behalf of the entity, with the exception of goods and merchandise. | With respect to this the commentaries explain at paragraph 5, that a person can be an individual or a company and; | "Lack of active involvement by an entity in transactions may be indicative of a grant of authority to an agent. For example an agent may be considered to possess actual authority to conclude contracts where he solicits and receives (but does not formally finalise) orders which are sent to a warehouse from which goods are delivered and where the foreign enterprise routinely approves transactions." | The Country X Agreement states that there will not be a PE where business is carried on through a broker, general commission agent or any other agent of an independent status, where that person is acting in the ordinary course of his business as such a broker or agent. | The Commentaries clarify that a person will be considered an independent agent where: | · they are independent of the enterprise both legally and economically, and | · acts in the ordinary course of the business wen acting on behalf of the enterprise. | Other considerations are risk and control borne by agent, and that the relationship between a Parent company and its Subsidiary does not automatically demonstrate that of a dependent nature. | In your case, your subsidiary is an independent agent, as evident by the level of control and risks borne by the Subsidiary. | The Country X Agreement recognises that where a company controls or is controlled by another i.e. whether through a PE or otherwise, this shall not make either company automatically a PE of each other. | Paragraph 7 of the Commentary further discusses that a: | · Subsidiary does not automatically constitute a PE of its parent company, | · Subsidiary for tax is an independent legal entity. | However a parent company may be found to have a PE where a subsidiary has a place of business. Thus where there is fixed space of the subsidiary at the disposal of the parent company, and carries on its own business there will be a PE for the parent company. | A PE will also exist where the subsidiary undertakes activities on behalf of the parent and or habitually exercises an authority to conclude contracts in the name of the parent, excepting where these activities are limited to those outlined in Article AA(x) or subsidiary acts in the ordinary course of its business as an independent agent to which Article AA(y) applies. | In your case, there is fixed space belonging to the Subsidiary, which is at your disposal. However the activities which take place in this space are limited to the storage and delivery of goods and or merchandise. | When we consider the commentary, although your subsidiary may not be able to formally conclude contracts they do "solicit and receive orders which are sent to a warehouse from which goods are delivered and where the foreign enterprise routinely approves transactions." Thus, your subsidiary arguably has some authority to conclude contracts on your behalf. | However, any authority which may be transferrable to the Subsidiary is limited to transactions for goods and or merchandise and is within the ordinary course of business in their role as an independent agent. | The Commissioner is satisfied that you do not have a Permanent Establishment in Australia because of your rented storage space or agent subsidiary or any other factor. Therefore you are not an Australian Resident Company for taxation purposes under the Country X Agreement, and will not be required to lodge returns in Australia.