Non-residents entities trying to legally avoid lodging Aussie tax returns

I love working for North Asian entities. When the are looking to operate in another country (like Australia), they first ask the question “can we avoid having to pay tax and lodging tax returns in the other country?” They are also willing to change their practices to simplify tax outcomes – not reduce tax payable overall but to just make the complexity of tax outcomes less of an issue.

This means when they are providing equipment into Australia they will attempt to avoid creating a permanent establishment (“PE”) in Australia. By doing this they avoid income tax in Australia on any of the fee and avoid needing to register for GST or agreeing to a reverse charge.

So how do they do this? They don’t install the product in Australia themselves and get the customer to sign and instalment agreement with an Australian entity, they don’t offer training in Australia and they don’t import the equipment.

But how far do they have to go to avoid a PE arising? Well ATOID 2014/29 considers a Japanese entity that wins a contract for plant to be installed in Australia. They don’t get the customer to contract for installation with an Australian entity but subcontract the work to an Australian entity. Is this subcontracting Australian installation enough to avoid a PE? No… “The Japanese entity will have a PE in Australia under Article 5(3) of the Japanese Convention where it uses an Australian subcontractor to perform the construction or installation duties for which it is contractually responsible – and the subcontractor spends more than 12 months on the construction site.”

So the answer is don’t subcontract but get the customer to contract with the Australian installer.

But even if they do this, they need to watch out for the “supervisory activities” provision in the definition of a PE in the tax agreements… “The Japanese entity will also have a PE in Australia under Article 5(4)(a) of the Japanese Convention because of its supervisory activities in connection with the construction or installation project.”

In this case, the income earned by the Japanese entity from the construction or installation project in Australia is assessable under section 6-5 and the subcontracting costs are deductible under 8-1. So to gain what may be a very small, or even non existant, mark-up and pay what might be a very small amount of Aussie tax on that mark-up the Japanese entity has to get a TFN, an ABN, lodge an Aussie tax return and manage the GST issues (lodge activity statements or organise a reverse charge agreement).

It might be easier, and possibly cheaper, to avoid a PE… And is definitely worth serious consideration BEFORE the final contract is signed.

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About Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.
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