Permanent establishment: supervisory activity as part of an installation project - UK resident

Is the enterprise of the taxpayer, a United Kingdom (UK) resident company and subsidiary of a corporate group, deemed to have a permanent establishment (PE) and to carry on business through that PE under Article 5.3(a) of Schedule 1 to the International Tax Agreements Act 1953 (the 2003 UK Convention), where it supplies a component of major equipment and supervises its installation over two months as part of a 3 year installation project undertaken by an Australian resident company which is also a subsidiary in the same corporate group?

Yes. In these circumstances, the enterprise of the taxpayer is deemed to have a PE and to carry on business through that PE under Article 5.3(a) of the 2003 UK Convention.

The taxpayer is a subsidiary company in a corporate group and is a resident of the UK for the purposes of the 2003 UK Convention under Article 4.1(a) of that Convention. The taxpayer conducts an enterprise in Australia.

The taxpayer does not have a PE in Australia under Article 5.1 of the 2003 UK Convention.

ACo is a resident of Australia for the purposes of the 2003 UK Convention under Article 4.1(b) of that Convention and has the same parent company as the taxpayer.

ACo has contracted with one of its customers to supply and install major equipment in Australia. The activities conducted by ACo under the contract with its customer are considered to be an 'installation project' for the purposes of Article 5.3(a) of the 2003 UK Convention. The installation project takes 3 years to complete.

Under a subcontract with ACo, the taxpayer supplies a component part of the major equipment required for completion of the installation project and sends an employee to Australia for two months to supervise the installation and integration of the part.

The activity conducted by the taxpayer under the subcontract is 'supervisory activity' for the purposes of Article 5.3(a) of the 2003 UK Convention.

The supervisory activity undertaken by the taxpayer's enterprise is one stage of ACo's installation project. The activity of the taxpayer's enterprise is conducted concurrently with the activities of ACo.

Article 5.3(a) of the 2003 UK Convention provides that an enterprise is deemed to have a PE in Australia and to carry on business through that PE if it: • has a building site or construction or installation project in Australia; or • undertakes a supervisory or consultancy activity in Australia connected with such a site or project,

but only if that site, project or activity lasts for more than 12 months.

Duration of Activity

To determine the duration of an enterprise's activity under Article 5.3(a), Article 5.4(a) of the 2003 UK Convention requires that the time period during which the enterprise conducts those activities in Australia is aggregated with the time period(s) during which activities connected with those activities are carried on in Australia by its associate. Article 5.4(b) provides that the period during which two associated enterprises are carrying on concurrent activities is only counted once.

'associated'

Article 5.4(c)(ii) of the 2003 UK Convention provides that an enterprise shall be deemed to be 'associated' with another enterprise if both are controlled directly or indirectly by a third person or persons.

As ACo and the taxpayer have the same parent company, Article 5.4(c)(ii) deems the taxpayer's enterprise to be 'associated with' ACo's enterprise for the purposes of Article 5 of the 2003 UK Convention.

'connected'

The term 'connected' is not defined in the 2003 UK Convention, nor in Australia's domestic taxation legislation. The ordinary meaning of the term 'connect', based on the Macquarie Dictionary definition, is 'to bind or fasten together, join, unite, link; to associate or attach'.

As the supervisory activity in Australia of the taxpayer' enterprise is one part of the project undertaken by ACo in Australia, the supervisory activity falls within the ordinary meaning of the term in that it is joined, united, linked or attached to ACo's installation project.

Paragraph 1.58 of the Explanatory Memorandum to the International Tax Agreements Amendment Bill 2003 states that 'activities will be regarded as being connected where, for example, different stages of a single project are carried out by different subsidiaries within a group of companies'.

In the present case, the taxpayer's enterprise completes one stage of ACo's installation project; one that is different to the stages completed by ACo. Accordingly, the activities of the taxpayer's enterprise in Australia are 'connected with the activities carried on in that State by its associate' for the purposes of Article 5.4(a) of the 2003 UK Convention.

Determining the duration of activities

Applying Article 5.4(a) of the 2003 UK Convention, the three year period during which ACo undertakes the installation project is aggregated with the two month period during which the taxpayer conducts its supervisory activity. However, under Article 5.4(b), the period during which the taxpayer's and ACo's enterprise carry on activities concurrently means that the duration of the taxpayer's activity for the purposes of Article 5.3(a) is determined as being 3 years; a period that 'lasts more than 12 months' for Article 5.3(a) purposes.

As the taxpayer's enterprise has conducted 'supervisory activity' in Australia that is connected with ACo's installation project, and that activity lasts longer than 12 months, the conditions for the operation Article 5.3(a) of the 2003 UK Convention have been satisfied. Accordingly, Article 5.3(a) deems the taxpayer's enterprise to have a PE in Australia and to carry on business through that PE. Note : Article 7 of the 2003 UK Convention ensures that only the profits that are attributable to the UK enterprise's (that is, the taxpayer's) PE in Australia may be taxed by Australia.