Taxation Determination TD 2005/2
Date of effect: 9 March 2005

What this ruling is about: 1. No, where the internet service provider (ISP) [1] is acting as a mere conduit, the Business Profits Article of the relevant Tax Treaty will apply. The non-resident will not, by virtue of the website alone, have a permanent establishment (PE) in Australia. The answer in this determination is provided on the basis of the assumptions in paragraph 2. If those assumptions are not fulfilled, the determination will not apply. 2. The following assumptions are made in this determination: Domestic law 3. Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a non-resident includes ordinary income derived directly or indirectly from all Australian sources as well as other ordinary income that a provision includes on a basis other than having an Australian source. In some circumstances, income derived by a non-resident from the sale of merchandise to Australian consumers through a website hosted by an Australian resident ISP may constitute assessable income of the non-resident under subsection 6-5(3). Application of Tax Treaties 4. Where the tax position involves a resident of a country with which Australia has a Tax Treaty it is necessary to consider the application of the relevant articles in the Tax Treaty. Where there is inconsistency, the terms of the Tax Treaty effectively override those of Australia's domestic tax law. Profits from the sale of trading stock would constitute the profits of an enterprise carried on by a resident of the treaty partner country and would fall under the Business Profits Article. [4] Under this article, Australia may not tax the business profits derived by an enterprise of the other contracting state unless those business profits are attributable to a permanent establishment situated in Australia through which the enterprise carries on business. Thus, the existence of a permanent establishment is central to the allocation of taxing rights under the Business Profits Article. Definition of permanent establishment 5. The term 'permanent establishment' is defined in the Permanent Establishment Article [5] in Australia's Tax Treaties, generally contained in Article 5. [6] The term is defined in Article 5(1) [7] to mean a: 6. Guidance on the application of this article to websites can be found in paragraphs 42.1 to 42.10 of the Commentary on Article 5 of the OECD Model Tax Convention on Income and on Capital (the Commentary). [8] The Commentary discusses whether the use of computer equipment in electronic commerce operations in a country can constitute a permanent establishment under the Business Profits Article of the OECD Model. 7. A distinction is drawn between computer equipment and the data and software used by, or stored on, that equipment. [9] A website is considered to be a combination of computer software and electronic data. The distinction between the website and the server on which the website is stored is important when, as in the case under consideration, the enterprise that operates the server is different from the enterprise that carries on business through the website. The server on which a website is stored is a piece of equipment with a physical location and may constitute a 'fixed place of business' of an enterprise which has that server at its disposal. [10] However, the fact that an enterprise has a certain amount of space on the server of an ISP allocated for it to use to store software and data does not result in the server being at the disposal of the enterprise. The enterprise is not considered to have acquired a place of business by virtue of the hosting arrangements. [11] 8. Where an ISP is only in the business of providing access to the internet it operates as a mere conduit for the business activities of the non-resident enterprise. The agreement with the ISP would not typically specify which server the website will be hosted on and the ISP may change the server used at their discretion. The space used for a specific website on the server of the ISP is not at the disposal of the entity that owns the website. Thus, the enterprise does not have a fixed place of business in Australia. 9. Article 5(2) [12] of Australia's Tax Treaties contains a list of examples each of which can be regarded as constituting a permanent establishment such as a place of management, an office, a branch, a factory or a workshop, or agricultural, pastoral or forestry property, etc. The website being a combination of software and data does not, of itself, fall within the list generally contained in Article 5(2). [13] 10. Under Article 5(5) [14] of Australia's Tax Treaties, an enterprise is deemed to have a permanent establishment where a person, other than an agent of an independent status, acts on behalf of an enterprise and habitually exercises an authority to substantially negotiate or conclude contracts on behalf of the enterprise. [15] However, under Article 5(6) [16] an enterprise will not be deemed to have a permanent establishment in Australia merely because that enterprise carries on business in Australia through a broker, general commission agent or any other agent of independent status, where the agent is acting in the ordinary course of their business. [17] 11. In most cases, an ISP will not constitute a permanent establishment by virtue of it being a dependent agent, because the ISP is not an agent of the enterprise and would lack the authority to conclude, and would not regularly conclude contracts on behalf of the non-resident enterprise. The website itself does not constitute a dependent agent as it is not a 'person' as defined in Australia's tax treaties. Furthermore, the ISP could constitute an independent agent acting in the ordinary course of their business if, amongst other things, they host websites for a number of different enterprises. [18] Conclusion 12. Where the sole presence of an enterprise in Australia is a website hosted by an Australian ISP, the enterprise does not have a permanent establishment in Australia, subject to the assumptions in paragraph 2. Date of effect 13. This Determination applies to years commencing both before and after its date of issue. However, it does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20). Commissioner of Taxation 9 March 2005






Preamble: The number, subject heading, date of effect and paragraph 1 to paragraph 2 of this document are a 'public ruling' for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. | [ Note: this is a consolidated version of this document. Refer to the ATO Legal Database ( http://law.ato.gov.au ) to check its currency and to view the details of all changes.] | fixed place of business through which the business of an enterprise is wholly or partly carried on. | Footnotes: Previously issued as Draft TD 2004/D77


Related rulings: TR 92/20 TR 2001/13
Legislative references: Income Tax Assessment Act 1997 6-5(3) TAA 1953 Pt IVAAA International Tax Agreements Act 1953 Sch 1 International Tax Agreements Act 1953 Sch 2 International Tax Agreements Act 1953 Sch 3 International Tax Agreements Act 1953 Sch 4 International Tax Agreements Act 1953 Sch 5 International Tax Agreements Act 1953 Sch 6 International Tax Agreements Act 1953 Sch 7 International Tax Agreements Act 1953 Sch 8 International Tax Agreements Act 1953 Sch 9 International Tax Agreements Act 1953 Sch 10 International Tax Agreements Act 1953 Sch 11 International Tax Agreements Act 1953 Sch 12 International Tax Agreements Act 1953 Sch 13 International Tax Agreements Act 1953 Sch 14 International Tax Agreements Act 1953 Sch 15 International Tax Agreements Act 1953 Sch 16 International Tax Agreements Act 1953 Sch 17 International Tax Agreements Act 1953 Sch 18 International Tax Agreements Act 1953 Sch 20 International Tax Agreements Act 1953 Sch 21 International Tax Agreements Act 1953 Sch 22 International Tax Agreements Act 1953 Sch 23 International Tax Agreements Act 1953 Sch 24 International Tax Agreements Act 1953 Sch 25 International Tax Agreements Act 1953 Sch 26 International Tax Agreements Act 1953 Sch 27 International Tax Agreements Act 1953 Sch 28 International Tax Agreements Act 1953 Sch 29 International Tax Agreements Act 1953 Sch 30 International Tax Agreements Act 1953 Sch 31 International Tax Agreements Act 1953 Sch 32 International Tax Agreements Act 1953 Sch 33 International Tax Agreements Act 1953 Sch 34 International Tax Agreements Act 1953 Sch 35 International Tax Agreements Act 1953 Sch 36 International Tax Agreements Act 1953 Sch 37 International Tax Agreements Act 1953 Sch 38 International Tax Agreements Act 1953 Sch 39 International Tax Agreements Act 1953 Sch 40 International Tax Agreements Act 1953 Sch 41 International Tax Agreements Act 1953 Sch 42 International Tax Agreements Act 1953 Sch 43 International Tax Agreements Act 1953 Sch 44 International Tax Agreements Act 1953 Sch 45 International Tax Agreements Act 1953 Sch 46 International Tax Agreements Act 1953 Sch 47 International Tax Agreements Act 1953 Sch 48 International Tax Agreements Act 1953 Sch 49
Subject references: commercial website electronic commerce internet service provider non-resident entities permanent establishment
Other references: Botto, F 2003, Dictionary of e-business: a definitive guide to technology and business terms, John Wiley & Sons Ltd, London Macquarie Dictionary, Revised 3rd Edition OECD Model Tax Convention on Income and on Capital July 2010 Condensed version