Issue
Does the installation of plant as part of a project by a United Kingdom (UK) resident taxpayer constitute a 'permanent establishment' in Australia within the meaning of that term in Article 5 of Schedule 1 to the International Tax Agreements Act 1953 (the United Kingdom Convention)?
Decision
Yes. The installation of plant as part of a project by the UK resident taxpayer will constitute a 'permanent establishment' in Australia within the meaning of that term in Article 5 of the United Kingdom Convention.
Facts
The taxpayer is a foreign resident company incorporated in the UK. The taxpayer has entered into a contract with an Australian company for the installation of plant and other works as part of a project located in Australia.
The period of the contract is greater than twelve months.
The taxpayer has entered into a subcontracting agreement with an unrelated Australian company to provide for the installation of plant and other works as detailed in the subcontracting agreement.
The taxpayer will provide a UK resident project director and engineers who will to oversee the installation of the project, as required.
Reasons for Decision
The term permanent establishment is defined in Article 5(1) of the United Kingdom Convention as a 'fixed place' of business through which the business of an enterprise is wholly or partly carried out.
Article 5(3)(a) of the United Kingdom Convention states that an enterprise shall be deemed to have a permanent establishment in Australia and to carry on business through that permanent establishment if it has a building site or construction or installation project in Australia, or it undertakes a supervisory or consultancy activity in Australia connected with such a site or project, but only if that site, project or activity last more than 12 months.
According to the facts, the taxpayer has entered into an agreement with an Australian company for the installation of plant as part of a larger project. Further to this the taxpayer has also entered into an agreement with an unrelated Australian company for the subcontracting of such works.
In Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338; 90 ATC 4717; (1990) 21 ATR 531, the High Court accepted that the OECD Model and the Commentaries on the Articles of the OECD Model (the OECD Commentary) may be relevant to the interpretation of tax treaties based on the OECD Model. The High Court approved recourse to the OECD Model and the OECD Commentary under Article 32 of the Vienna Convention (see paragraph 102 of Taxation Ruling TR 2001/13). Unless specified otherwise, references to the OECD Model and Commentary are to the version published on 15 July 2005.
Paragraph 16 to 20 of the OECD Commentary on Article 5 of the OECD Model discusses situations where a building site or construction or installation project constitutes a permanent establishment where that building site or construction or installation project lasts more than 12 months.
Paragraph 17 of the OECD Commentary explains that the term 'installation project' is not restricted to an installation related to a construction project; it also includes the installation of new equipment, such as a complex machine, in an existing building or outdoors.
It is considered that the installation of plant and other works constitutes an installation project. The contract entered into with the subcontractor to undertake the work outlined in the agreement would not preclude it from the operation of Article 5(3)(a) of the United Kingdom Convention.
Paragraph 19 of the OECD commentary indicates that if a general contractor has undertaken the performance of a comprehensive project, subcontracts part of that project to other enterprises (subcontractors), the period spent by a subcontractor working on the building site must be considered as being time spent by the general contractor on the building project. This particular statement implies that the use of subcontractors by the taxpayer would not preclude the taxpayer from having an installation project.