- Does your overseas business have operations in Australia?
- What constitutes a permanent establishment?
- Selling goods through a permanent establishment in Australia
- Plans for a global minimum corporate tax rate
- What to do if you are unsure if your business is a Permanent Establishment?
What is a Permanent Establishment?
Permanent Establishment (PE) is the fundamental criteria by which the Australian Taxation Office determines whether an enterprise is doing business in Australia and is alleged to have formed a taxable presence.
Why it matters now
Recent tax reforms, in response to the rise in schemes eroding domestic taxable profit, has seen the definition of PE expanded and corporate structures re-categorised regardless of the entity status.
Consequently, your enterprise may now fall under the definition of a Permanent Establishment.
Why you should be concerned
Permanent Establishment at present crosses many jurisdictions (domestic law, tax treaties, international practices) making it a confusing and tricky area.
An incorrect determination of a permanent establishment could be a damaging error, as Australia enforces taxation on the worldwide income of entities resident in Australia.
Does your overseas business have operations in Australia?
If your enterprise conducts business in Australia, even if it does not reside here, your entity may now be classified as a permanent establishment. It does not necessarily mean you will be subjected to additional taxes but may require local tax return lodgements.
Under the Australian double tax treaty, any tax will only be paid on profits that are attributable to a permanent establishment.
What constitutes a permanent establishment?
A permanent establishment is generally defined in Australia’s Double Tax Agreements (DTA) as being a fixed place of business through which the business of the enterprise is carried on in whole or part.
It usually includes a branch, office, workshop – even the furnishing of services for certain periods of time. A permanent establishment is defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).
With differing tax laws between countries and the implication of double tax agreements, an overseas enterprise can still be considered a permanent establishment in Australia if any activity carried out by it in Australia generates revenue or value is created.
The ATO has established a ‘directly in connection’ test to help determine if an enterprise is a permanent establishment. This test looks at the relationships between suppliers, distributors and resellers and how these arrangements have contributed to the supply of goods or services.
It also looks at how new customers are attracted and client interactions, the provisions and setups for ongoing support to the customer base and the acquisition of demand for sales.
Examples of business setups that may be classified as permanent establishments
Your enterprise may now fall under the definition of a PE. Here are some common scenarios that are considered a PE –
- Where an enterprise has created auxiliary employee activities in Australia. This includes direct sales employees’ activities.
- Branches (as opposed to a subsidiary) who transact with third parties as well as a high volume of internal ‘dealings’ with head office and other branches. This set up is particularly common in the financial services industry.
- Business operations carried on by an Australian resident entity at or through a fixed place of business in another country.
- Business operations carried on by a foreign resident entity at or through a fixed place of business in Australia.
- When a foreign entity makes a supply to an independent distributor who is returning sales income in Australia.
Selling goods through a permanent establishment in Australia
If your business exports goods to Australia through a resident entity and you employ people, you will need to check if there is a tax treaty with Australia.
If you have a tax treaty you are obliged to pay the relevant taxes such as income tax, PAYG and superannuation (on employee payments), GST, capital gains tax (on assets), or fringe benefits tax.
If you do not have a tax treaty with Australia, you may need to pay taxes such as income tax, goods and services tax, and PAYG (on employee payments), plus other relevant taxes.
In the situation where you are exporting goods to Australia by selling to an Australian resident entity on a free on board (FOB) basis, this may be considered an importation by the Australian entity. This means you may not have Australian tax obligations – rather, your Australian customer will have tax obligations relating to the importation.
More information on importing goods to Australia can be read here
Plans for a global minimum corporate tax rate
The Organisation for Economic Cooperation and Development (OECD) has been working to get countries to reach a global consensus on its plan to end multinational tax avoidance (Australian Financial Review).
They have released a consultation document for a Unified Approach in modifying the current international business tax rules to address the digitalisation of the global economy.
The Unified Approach would also allow market jurisdictions to tax the return on so-called baseline distribution and marketing activities, where these are carried out by a subsidiary or physical permanent establishment of a multinational enterprise within the jurisdiction.
The consultation document advocates using globally agreed fixed rates of return to calculate this taxable amount, perhaps on an industry basis, as a way of reducing transfer pricing disputes.
What to do if you are unsure if your business is a Permanent Establishment?
We recommend you consider getting an expert opinion on whether your enterprise or business dealings in Australia constitutes a permanent establishment under local tax rules, as they do vary considerably between countries.
Once this has been established and if found to be a PE, accounting procedures and processes can be set up to ensure your enterprise is compliant with all tax and document lodgements and if required, the correct tax is being paid.
There may be a more efficient way to set up your business in Australia and this can be discussed.
My business is a Permanent Establishment, what do I do now?
If your enterprise has been classified as a permanent establishment, you may not have to pay more tax but will need to choose to comply with either Australian accounting standards, international accounting standards, or certain overseas standards.
Under the Income Tax Assessment Act 1997 (subsection 820-960(1A)) Australian permanent establishments (PEs) who choose this subsection to prepare their statements of financial performance and financial position must fully comply with Australian accounting standards.
The Commissioner may decide (under subsection 820-960(4)) that an entity, or entities within a class of entities, do not need to comply with all or any part of the standards.
Doing Business In Australia
Want more information about setting up a business in Australia? Download your FREE Doing Business in Australia Guide today! Get up to date information you need to know before you start.
Significant Global Entities
The definition of Significant Global Enterprise (SGE) has been extended as well. An SGE now includes members of large private groups headed by unlisted companies, trusts (including discretionary trusts), partnerships or other investment vehicles. Is your enterprise considered an SGE?
Get in touch
To discuss any aspect of permanent establishments – definitions, compliance, exemptions, double tax agreements – the team at Penguin Management would be happy to discuss your queries and business options. Talk to us today on 1300 319 870 or contact us here.