Private ruling: Permanent Establishment
Published: September 2013
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Questions and answers | 1. Does company X have a permanent establishment in Australia? | Yes. | 2. Is company X's Australian source income assessable in Australia? | Yes. | 3. Is company X entitled to a 0% withholding rate variation of foreign contractor withholding tax? | No.

Relevant facts and circumstances: Company X is incorporated in and is a tax resident in country Y. Company X carries out large scale construction. Company X has been successful in tendering for a project in joint venture with an Australian resident taxpayer. The company will have a temporary project office in practicable proximity to the project site. Upon the termination of the project, they will leave Australia. It is proposed that the joint venture will register for tax in Australia as a partnership. Company X will he required to send to Australia a reasonably sized team of staff in order to appropriately plan the works. These staff will be in Australia for more than 6 months. These staff will likely be operating out of a temporary project office for the duration of the contract in Australia, and will be required to travel to the site periodically. Given the location of the project and the requirement to travel internationally, this office location has been chosen for its practicalities and proximity to the project site. The activities that will be carried out at the office will consist of design, planning and supervisory activities exclusively for the project.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1936 Section 6(1) | International Tax Agreements Act 1953 Section 4 | International Tax Agreements Act 1953 Section 5 | Taxation Administration Act 1953 Subdivision 12-FB of Schedule 1 | Taxation Administration Regulations 1976

Reasons for decision: Detailed Reasoning - Permanent establishment: Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a non-resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year. The income derived from construction work undertaken in Australia is ordinary income for the purposes of subsections 6-5(3) of the ITAA 1997. In determining liability to tax on Australian sourced income, it is necessary to consider not only the income tax laws but also any applicable tax treaties contained in the International Tax Agreements Act 1953 (Agreements Act). Section 4 of the International Tax Agreements Act 1953 incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the 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 Y Agreement (the Agreement) is listed in section 5 of the Agreements Act. The Agreement operates to avoid the double taxation of income received by residents of Australia and Country Y. Under Article X of the Agreement, the business profits of an enterprise of country Y shall be only taxable in country Y unless the enterprise carries on business in Australia through a permanent establishment (PE) situated in Australia. If so, so much of the profit of the enterprises profit attributable to the PE in Australia may be taxed in Australia. PE is defined in Article Z of the Agreement as a fixed place of business through which the business of an enterprise is wholly or partly carried on, and includes: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, quarry or 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 exists for more than twelve months. In interpreting the wording of the tax treaty, the Commissioner accepts in Taxation Ruling TR 2001/13 that it is appropriate to have reference to the OECD Commentary on the Model Tax Convention on Income and Capital (the OECD Model Commentary). The Commentary discusses the definition of permanent establishment in more detail. Paragraph 12 of the Commentary contains a list, by no means exhaustive, of examples, each of which can be regarded, prima facie, as constituting a permanent establishment. As these examples are to be seen against the background of the general definition given in paragraph 1, it is assumed that the Contracting States interpret the terms listed, "a place of management", "a branch", "an office", etc. in such a way that such places of business constitute permanent establishments only if they meet the requirements of paragraph 1 of the Commentary. Paragraph 1 of the Commentary gives a general definition of the term "permanent establishment" which brings out its essential characteristics in the sense of the Agreement, i.e. a distinct "situs", a "fixed place of business". The paragraph defines the term "permanent establishment" as a fixed place of business, through which the business of an enterprise is wholly or partly carried on. This definition, therefore, contains the following conditions: · the existence of a "place of business", i.e. a facility such as premises or, in certain instances, machinery or equipment; · this place of business must be "fixed", i.e. it must be established at a distinct place with a certain degree of permanence; · 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. Paragraph 6 of the Commentary says since the place of business must be fixed, it also follows that a permanent establishment can be deemed to exist only if the place of business has a certain degree of permanency, i.e. if it is not of a purely temporary nature. A place of business may, however, constitute a permanent establishment even though it exists, in practice, only for a very short period of time because the nature of the business is such that it will only be carried on for that short period of time. It is sometimes difficult to determine whether this is the case. Whilst the practices followed by member countries have not been consistent in so far as time requirements are concerned, experience has shown that permanent establishments normally have not been considered to exist in situations where a business had been carried on in a country through a place of business that was maintained for less than six months (conversely, practice shows that there were many cases where a permanent establishment has been considered to exist where the place of business was maintained for a period longer than six months). In this case company X has set up an office in Australia. The activities that will be carried out at the office will consist of design, planning and supervisory activities exclusively for the project. This office will be in existence for more than six months and will be in the same location for the whole of the time to do a specific job. Company X therefore has a PE in Australia in accordance with Article Z of the Agreement and the explanatory paragraphs contained in the OECD Commentary on the Model Tax Convention on Income and Capital. In accordance with Article X of the Agreement and subsection 6-5(3) of the ITAA 1997, the income derived by company X in Australia is assessable in Australia. | Detailed Reasoning - Withholding tax: Subsection 12-315(1) of Sch 1 to the Taxation Administration Act 1953 (TAA) provides that withholding is required if the entity carrying on the enterprise makes the payment to another entity or to other entities jointly. This means the withholding obligations can apply to a payment to a partnership if one or more of the partners in the partnership will satisfy the conditions specified in subsection 12-315(2) of the TAA. Similarly, the withholding obligations can also apply to a joint venture if one or more of the persons in the joint venture will satisfy the conditions in the subsection. An entity is covered by subsection 12-315(2) of the TAA if any of the following conditions is satisfied: (a) the entity is a foreign resident; (b) the payer believes, or has reasonable grounds to believe, that the entity is a foreign resident; (c) the payer has no reasonable grounds to believe that the entity is an Australian resident, and either: (i) the entity has an address outside Australia (according to any record that is in the payer's possession, or is kept or maintained on the payer's behalf, about the transaction to which the payment relates); or (ii) the payer is authorised to make the payment at a place outside Australia (whether to the entity or to anyone else); (d) the entity has a connection outside Australia of a kind set out in the regulations. Withholding is required from a payment of a kind set out in the regulations. The Taxation Administration Regulations 1976 (TAR) prescribe that payments (made or received on or after 1 July 2004) under contracts for the construction, installation and upgrading of buildings, plant and fixtures and for associated activities are subject to withholding. Payments to foreign residents are not included in the general exceptions from withholding for exempt income in subsection 12-1(1) of Sch 1 to the TAA. Therefore, withholding from payments to foreign residents will be required regardless of whether the amount is exempt income. It follows, if company X has withholding obligations under section 12-315 of the TAA, the withholding requirement remains whether or not company X has a PE in Australia. Company X does have a PE in Australia. Therefore, company X is not entitled to a 0% withholding rate variation of foreign contractor withholding tax.