1 While the XXXX employees are working on secondment in Australia, is their 'income from employment' (salaries, wages and other similar remuneration) taxable in Australia, under the income from employment Article of the Double Taxation Agreement (DTA) between Australia and XXXX?
Yes Question 2 While the XXXX employees are working on secondment in Australia, will the Australian entity be deemed to be the 'employer' under the DTA and therefore, have: • an obligation to report and withhold any Pay-As-You-Go ('PAYG') amounts; • an obligation to meet fringe benefits tax (FBT) requirements in respect of any fringe benefits that are provided; and • an obligation to make Superannuation Guarantee (SG) payments? Answer Yes This ruling applies for the following periods: FBT year ending 30 March 20XX Income tax year ending 30 June 20XX The scheme commenced on: 1 April 20XX
This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The home country employers work in the XX industry and are XXXX tax residents. They have been sending employees to Australia to work on projects. The work is carried out hand in hand with the Australian entity employees. The employees undertake specific activities in Australia. The employees are sent to undertake specific roles for a certain amount of time (which can be for days, weeks or months). All employees enter Australia on a short-term visa. All visas have a stay limitation in Australia of 90 days for each trip. The employees will continue to adhere to XXXX reporting lines whilst in Australia. The employees will not be transferred to the Australian entity's payroll. They will remain on their home country payroll. The XXXX entities will charge the Australian entity for the services provided plus a markup.
The employees will need to be present in Australia to ensure that they are able to assist Australian employee. They will continue to support Australian employees from XXXX (whilst not physically present in Australia) until the project is fully completed. The employees will reside at various hotels and/or extended stay residences while in Australia. You advised the Australian entity is a permanent establishment of the foreign entities.
and other materials Income Tax Assessment Act 1997 Income Tax Assessment Act 1936 Fringe Benefits Tax Assessment Act 1986 Superannuation Guarantee Administration Act 1992 Tax Administration Act 1953 (TAA) Section 12-35 of schedule International Tax Agreements Amendment Bill 2016 Explanatory Memorandum The Australia-XXXX Double Tax Agreement (DTA) Taxation Ruling TR 2001/13: Interpreting Australia's Double Tax Agreements ATO Fact Sheet: Foreign resident employers - your tax and super obligations OECD Model Tax Convention on Income and Capital, condensed version, 22 July 2010
Question 1 While the employees are working on secondment in Australia, is their 'income from employment' (salaries, wages and other similar remuneration) taxable in Australia, under income from employment article of the DTA between Australia and XXXX? Summary The income from employment Article 14 of the DTA between Australia and XXXX determines which country has taxing rights over the income from employment earned by the employees while they are working on secondment in Australia. In certain circumstances, employment income earned by a foreign resident while working in Australia for a short period (up to 183 days), is not to be taxed in Australia (the short-term visit exception). In this case the short-term visit exception does not apply and the DTA deems the employment income to be Australian-sourced and taxable in Australia. Detailed Reasoning Interpretation Now! Episode 53 - interpretation of DTAs explains that the overarching objectives of DTAs are the avoidance of double taxation (on specified types of income) and the combatting of fiscal evasion. A DTA becomes part of Australia's domestic law once it has been legislated by parliament. The Agreements Act
gives our DTAs the force of law and requires the Assessment Acts to be 'read as one' with the Agreements Act. Thus, the legislated DTA text becomes part of the overall legislative framework for assessing the income tax liabilities of relevant taxpayers and has priority over the Assessment Acts. Taxation Ruling TR 2001/13: Interpreting Australia's Double Tax Agreements confirms that the terms of the DTA overrides those of the Assessment Acts; this means that if a DTA is in force it cannot be overlooked. The factual scenario in this case involves employees of XXXX entities who are working on short term secondment in Australia, for an Australian entity. We have been asked to treat this entity as a permanent establishment. The employees remain on the payroll of their XXXX employer whilst they are working in Australia, so would be receiving (all or some) salary and wages directly from them. However, the Australian entity bears the remuneration costs of the secondments (including a markup.
There is a legislated DTA currently in place between Australia and XXXX. As the DTA has priority over other domestic laws, it is necessary to consider how it applies in allocating the taxing rights between the two jurisdictions over different categories of income. For DTA purposes, the type of remuneration paid to the employees is 'income from employment'. As explained in the relevant Explanatory Memorandum to the DTA: Under the Income from employment article, salaries, wages and other similar remuneration will generally be taxable in the country where the employment is exercised. ... Employment income derived by a resident of one country in respect of employment exercised in the other country is not taxable in the other country if the employee is present in the other country for 183 days or less in any 12 month period (commencing or ending in the fiscal year concerned), the remuneration is paid for by or on behalf of the employer that is not a resident of the country where the employment is exercised and the remuneration is not borne by a permanent establishment of the employer in that country.
Taxing rights over fringe benefits provided to the employees will be allocated exclusively to the country that has the sole or primary taxing right in respect of the underlying employment income to which the fringe benefit relates. This Article operates on the basis that the primary taxing right lies with the country that may impose tax on the relevant employment income, being tax in respect of which the other country is required to provide relief under Article XX. Specifically, the wording of income from employment Article of the DTA states: ARTICLE Income from Employment 1. Subject to the provisions of Articles XX, XY, and XZ, salaries, wages and other similar remuneration derived by an individual who is a resident of a contracting state in respect of an employment shall be taxable only in that state unless the employment is exercised in the other contracting state. If the employment is so exercised, such remuneration as is derived from that exercise may be taxed in that other state.
2. Notwithstanding the provisions of paragraph 1, remuneration derived by an individual who is a resident of a contracting state in respect of an employment exercised in the other contracting state shall be taxable only in the first mentioned state if: (a) the recipient is present in the other state for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned; and (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of that other state; and (c) the remuneration is not borne by a permanent establishment which the employer has in that other state.
4. Where, except for the application of this paragraph, a fringe benefit is taxable in both contracting states, the fringe benefit will be taxable only in the contracting state that has the sole or primary taxing right in accordance with the agreement in respect of salary, wages or other similar remuneration from the employment to which the fringe benefit relates. A contracting state has a "primary taxing right" to the extent that a taxing right in respect of salary, wages or other similar remuneration from the relevant employment is allocated to that state in accordance with this agreement and the other contracting state is required to provide relief for the tax imposed in respect of such remuneration by the first-mentioned state. Short term visit exception The ATO Fact Sheet: Foreign resident employers - your tax and super obligations (the Fact Sheet) states: Many DTAs with Australia provide that, in certain circumstances, employment income earned by a foreign resident while working in Australia for a short period (up to 183 days), is not to be taxed in Australia (the short-term visit exception).
If the short-term visit exception does not apply, a DTA may deem employment income earned by a foreign resident while working in Australia to be Australian-sourced and taxable in Australia. The reference above in paragraph 2 of the Article to working in Australia for a short period is referring to what is known as the short-term visit exception (as per the Fact Sheet). Where the short-term visit exception applies, the home country entity continues to be treated as the employer. It is noted that whilst the general rule, is that the exception will apply, there are some circumstances where the exception is denied. Where this happens, the Australian entity will be treated as the employer. This treatment is based on Australia taking an 'Economic Employer' approach. The ATO view in regard to this issue, is contained in Taxation Ruling TR 2013/1: The identification of 'employer' for the purposes of the short-term visit exception under the Income from Employment Article, or its equivalent, of Australia's tax treaties. Permanent establishment
Paragraph 2 of the Article above, also refers to a PE, and the requirement that the employee's remuneration is not borne by the PE. The definition of a PE is dealt with in the DTA. It is acknowledged that determining whether there is a PE establish can be complex. In this case, we have been advised that the Australian entity is a PE. Once it is established that there is a PE, the next condition to be satisfied is whether the remuneration is borne by the PE. The Fact Sheet flags that remuneration is not borne by a PE where the salary and wages are not deductible against the profits of an Australian PE. Application to facts
In this case, the employees receive employment income while they are working in Australia. The taxing rights over this income type is dealt with under the income from employment Article of the DTA. All employees enter Australia on a short-term visa. All visas have a stay limitation in Australia of 90 days for each trip. Accordingly, the employees are working in Australia for a short period (up to 183 days) so potentially the short-term visit exception (under paragraph 2) applies. However, the short-term visit exception is not applicable if there is a PE, and the remuneration is borne by that PE. The Australian entity is a PE of the foreign entity, so the first requirement is met. Does the PE bear the costs of remuneration? When the employees are working in Australia, they remain on their XXXX payrolls and are not transferred to the Australia entity's payroll. The cost of the employees in Australia is borne by their respective XXXX employers. However, the XXXX employers then charge the Australia entity for the services provided plus a markup.
Whilst initially the XXXX employers bear the cost of remuneration for the employment exercised in Australia, ultimately the cost is borne by the Australian entity. That is, the cost of the employees is an expense of the Australian entity; these costs would be deductible against the profits of the PE. Conclusion Although the employment is exercised in Australia for short periods, it is considered that the short-term visit exception under Article 14 does not apply as the cost of remunerating the employees is borne by the PE. It is concluded that the income of the employees is not treated as being foreign sourced, and that Australia has primary taxing right on salary and wages, and fringe benefits derived by the employees. Accordingly, the employment income is taxable in Australia, under Australian law. Question 2 While the XXXX employees are working on secondment in Australia, will the Australian entity be deemed to be the 'employer' under the DTA and therefore, have: • an obligation to report and withhold any Pay-As-You-Go ('PAYG') amounts; • an obligation to meet fringe benefits tax (FBT) requirements in respect of any fringe benefits that are provided; and
• an obligation to make Superannuation Guarantee (SG) payments? Summary While the employees are on secondment, the Australian entity will be deemed to be the employer under the DTA. Australian employers have a range of obligations that must be complied with. As the employees remain on their home country payroll, the home country employer may also have obligations as a paying entity. The employers will need to consider how to manage their various Australian tax and reporting obligations. Detailed Reasoning As determined above, the employment income of the XXXX employees when they are working on secondment is taxable in Australia under Australian law. This raises the question as to whether the Australian entity is treated as the employer under the DTA. This can be answered by reference to the commentary to Article 15 of the OECD Model Tax Convention on Income and Capital ('the OECD Model'). Article 15 deals with income from employment and provides guidance to interpreting the DTA. The relevant extract is from paragraph 8.7 which states:
Since the concept of employment to which Article 15 refers is to be determined according to the domestic law of the state that applies the convention (subject to the limit described in paragraph 8.11 and unless the context of a particular convention requires otherwise), it follows that a state which considers such services to be employment services will apply article 15 accordingly. It will, therefore, logically conclude that the enterprise to which the services are rendered is in an employment relationship with the individual so as to constitute his employer for purposes of subparagraph 2 b) and c). That conclusion is consistent with the object and purpose of paragraph 2 of Article 15 since, in that case, the employment services may be said to be rendered to a resident of the state where the services are performed.
Based on the commentary the Australian entity will be deemed to be the employer while they are on secondment. Under Australian law, a range of employer payment, reporting, withholding obligations may arise in relation to the inbound employees. The various employer obligations include salary and wages payments, superannuation contributions, FBT, PAYG withholding, payroll tax, workers' compensation, Medicare levy, and Single Touch Payroll (STP) reporting. Sometimes, employees who are seconded to work in Australia may continue to have all or part of their base salary and other remuneration paid by the offshore entity (i.e. the home country employer). In the current case, the employees remain on the XXXX payroll and therefore, all or part of their remuneration will be delivered through that payroll.
Where payments are made by the home country employer, this may also give rise to tax and super obligations for that employer. This is because section 12-35 of schedule 1 to the Taxation Administration Act 1953 (TAA 1953) for example, specifies that an entity that pays salary, wages, commission, bonuses or allowances to an individual as an employee must withhold an amount from the payment. The individual may be an employee of the payer or of another entity. As the entity paying the salary and wages the home country employer can also be an employer as defined in the FBTAA. They may also have superannuation obligations arising from the ordinary time earnings that that pay. Generally, all employees are eligible for super guarantee; this includes international workers, even if they are a temporary resident.
In these types of circumstances, the relevant employer entities must consider how to comply with the various taxation obligations that arise. For example, the home country employer can arrange for the Australian associate or affiliate to undertake all of the obligations on their behalf. taxation obligations can also be reported via an Australian payroll, using a shadow payroll process to calculate, remit and report the taxes that are due in the host location. It is also noted that employees who have all, or part, of their base salary and other remuneration paid by an offshore entity are classified as 'inbound assignees'. Australian employer entities must report all of their inbound employees via STP. Conclusion The Australian entity is considered to be the employer for DTA purposes even though the employees remain on their home country payroll as there is a permanent establishment. The XXXX entity may also have obligations under Australian law. All Australian taxation obligations arising in respect of the employees must be complied with; this may involve meeting STP requirements and include the use of a shadow payroll process.