Private ruling: foreign income tax offset
Published: May 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: Year ended 30 June 2012

Ruling: Q1: Is the company entitled to a foreign income tax offset for the income tax withheld from their gross income in the foreign country on consultancy fees? | A1: Yes. | Q2: Is the amount of withholding tax that is eligible to be included in the income tax return as foreign income tax offset limited to the amount to which the company is entitled | A2: Yes.

Relevant facts and circumstances: The company is incorporated in Australia. The company has been awarded a contract to review the contract between the independent consumer and competition commission and the state owned corporation in the foreign country. The company is a consultancy entity with expertise in the regulation. The work commenced in the year ended 30 June 2012 and concluded in the year ended 30 June 2013. All resources allocated to this project will be provided from the Australian company office. The company will be providing both employees and consultants to carry out this work in the foreign country. While contract administration will occur from the Australian office of the company, the majority of the technical analysis and liaison with the employees will occur in the foreign country. The company does not have a branch or fixed base available in the foreign country. The company employees perform their work by hot desk in the client's premises or at other times used the hotel room. Consultation activities were undertaken both on the client's premises in the foreign country and also via audio conference/email from the company's Australian office. The company's role provides professional business consulting / advisory services to analyse business information to determine specific business requirements, strategies and actions. The company's involvement in the project was one of contribution, that is, the company provides advice to project owner who has the legal responsibility for the delivery of the project. The company employee and consultant in the foreign country do not have an exercised authority to negotiate and conclude on behalf of the company. The company pays the consultant for the consultation activities undertaken in the foreign country. The foreign country withheld Foreign Contractor (Withholding) Tax from the gross payment made to the company and forwarded remittance to the foreign country's tax authorities. The company will include the foreign income as Australian sourced income in the company income tax return as assessable income. The consultant of the company is not required to lodge an income tax return in the foreign country.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Section 770-10 | Income Tax Assessment Act 1997 Subsection 770-15(1) | Income Tax Assessment Act 1997 Section 770-70 | Income Tax Assessment Act 1997 Subsection 770-130(2) | Income Tax Assessment Act 1997 Section 770-140 | International Tax Agreements Act 1953 Section 3AAA | International Tax Agreements Act 1956 Section 5

Reasons for decision: Summary: The company is entitled to a foreign income tax offset (FITO) for the income tax withheld from the gross income in the foreign country on consultancy fees limited to which the company is entitled under section 770-10 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident company includes ordinary income from all sources, whether in or out of Australia during the income year. Income derived from consultancy services is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. In determining an Australian company's liability to tax on income derived from providing services to a foreign company, it is necessary to consider not only the ITAA 1997 but also any applicable tax treaty as set out in Australian Treaty Series. There is a tax treaty between Australia and the foreign country (the foreign country Agreement). The foreign country Agreement operates to avoid the double taxation of income received by Australian and the foreign country residents. An article of the foreign country Agreement provides that the foreign country may tax the income derived by a foreign contractor from a prescribed contract within the meaning of the foreign country law, where the contractor is an Australian resident with a permanent establishment (PE) in the foreign country. An article of the foreign country Agreement defines PE to mean a fixed place of business through which the business of the enterprise is partially or wholly carried on. An article of the foreign country Agreement contains a list of a number of activities which can be regarded as constituting a permanent establishment. An article of the foreign country Agreement provides that an enterprise of Australia will be deemed to have a permanent establishment in the foreign country if the services are furnished in the foreign country, including consultancy services through employees or other personnel engaged by the enterprise for such purposes, and those activities continue for the same or a connected project within the foreign country for a period or periods aggregating more than 90 days in any year of income. In this case, the company is an Australian resident company which provides consultancy services in the foreign country for more than 90 days. Therefore, the company is deemed to have a permanent establishment in the foreign country. Consequently, an article of the foreign country Agreement applies and the income may also be taxable in the foreign country as the company is deemed to carrying on its business through a permanent establishment in the foreign country. As the company is an Australian resident company, the income earned in the foreign country is assessable under subsection 6-5(2) of the ITAA 1997. | Detailed Reasoning - FITO: Section 770-10 of the ITAA 1997 is the primary provision under which a foreign income tax offset arises. FITO can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income. Foreign income tax is a tax imposed by a law other than an Australian law, on income, profits or gains (subsection 770-15(1) of the ITAA 1997). The taxpayer must have paid the foreign income tax before an offset is available. A taxpayer is deemed to have paid the foreign income tax if the foreign income tax has been withheld from the income at its source. A taxpayer will be deemed to have paid foreign income tax where it has been paid by another entity under a law relating to the foreign income tax (subsection 770-130(2) of the ITAA 1997). This provision will apply where another entity is required to pay the foreign income tax on behalf of the taxpayer by the foreign law that imposes that tax. It allows a taxpayer to claim a tax offset in situations where taxes are paid by another entity by deduction or withholding due to requirements in the relevant law. However, section 770-140 of the ITAA 1997 will deem you not to have paid foreign income tax to the extent that you or any other associated entity become entitled to a refund of the foreign income tax . When claiming a FITO, you are required to gross up your income for the foreign tax paid (or which is taken to have been paid) in respect of that income. The amount of the tax offset is the sum of all foreign income tax that has been paid by the taxpayer for the income year subject to a limit (cap) (section 770-70 of the ITAA 1997). The foreign tax offset cap is based on the amount of Australian tax payable on the double-taxed amounts and other assessable income amounts that do not have an Australian source. If foreign tax has been withheld from amounts paid, the taxpayer is entitled to claim a FITO only for the proportion of the foreign income tax which equates to the proportion of foreign income included in the assessment subject to the foreign income tax offset cap. In this case, the foreign country withheld foreign contractor (Withholding) tax from the company's gross earnings under the law of the foreign country in respect of the amount that is assessable to the company. The tax was imposed under the law of the foreign country on the income, profit or gains. Consequently, the company is entitled to FITO for the income tax withheld from their gross income in the foreign country on consultancy fees limited to the amount to which the company is entitled under section 770-10 of the ITAA 1997. Note More information on the calculation of the FITO cap and entitlements are available on the Tax office website www.ato.gov.au at the link to "Guide to foreign income tax offset rules 2008-09"

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