Fixed base under the UK-Australia Tax Treaty

The Australian Tax Office (ATO) made available recently an interpretative decision on a case dealing with a non-resident performing independent personal services in Australia. This ATO interpretative decision is a good example of how tax authorities should publicize their decisions on the interpretation of tax treaties. It is also a good way to practice the real application of treaties to concrete situations. Below you find the decision (with the text slightly adjusted). In fact, for purposes of simplification all references to Australian domestic law were eliminated and focus given to the issue under the tax treaty between UK and Australia.

The issue was whether income derived by the taxpayer, a resident of the United Kingdom (UK), from the provision of services in Australia as a designer was taxable in Australia.

The underlying facts were the following:
(1) The taxpayer is a non-resident for Australian tax purposes and carries on a design business from a home office in the UK.
(2) The taxpayer contracted with an Australian company to provide design services within the arts and entertainment industry.
(3) After initially providing the services pursuant to the contract from the home office in the United Kingdom, the taxpayer then continued doing this in Australia continuously for 111 days at space made available to the taxpayer within a studio.
(4) The space made available each time the taxpayer provided the services was merely an area within the studio not already in use at that particular point in time. The space made available was not a specifically defined area within the studio, such as an office or other such room, nor was it the same space on all occasions.

Since Australian law provides that income of a non-resident taxpayer includes ordinary income derived directly and indirectly from all Australian sources during the income year, the question remains whether the tax treaty restricts Australia to tax the income of the said non-resident.

In fact, the tax treaty between Australia and the UK must be considered to determine whether Australia has a taxing right in respect of the income derived in Australia by the non-resident taxpayer. Art. 11 of the actual treaty (which corresponded to the old Art. 14 of the OECD Model) provided that the income derived by a UK resident taxpayer from professional services or other independent activity of similar character may be taxed in Australia where a fixed base was regularly available to the UK resident for the purposes of performing those activities. In that regard, it should be noted that the provision of design services by the taxpayer was considered a professional service or other independent activity of a similar character within the meaning of Art. 14.

To further resolve the issue, the ATO made use of the OECD Commentaries (a good practice). In that regard, reference was made to paragraph 3 of the OECD Commentary on the former Art. 14 witch stated that: (i) the provisions of Art. 14 were similar to those for business profits and rested on the same principles as those of Art. 7 concerning the taxation of business profits; and (ii) the provisions of Art. 7 and the Commentary thereon could be used as guidance for interpreting and applying Art. 14 of the OECD Model.

In that regard, Art. 7 of the OECD Model permits the source country to tax the profits of an enterprise where that enterprise carries on business through a permanent establishment (PE) in that country. So the issue now rests in determining the existence of this fixed base/PE.

Art. 5 of the OECD Model defines PE to be a fixed place of business through which the business of an enterprise is wholly or partly carried on. Paragraph 2 of the OECD Commentary on Art. 5 of the OECD Model explains that this definition provides three conditions necessary for a PE to exist: (1) There must be a place of business; (2) The place of business must be fixed so that there is a distinct location with a certain degree of geographical and temporal permanence; (3) The business of the enterprise must be conducted through that fixed place.

The ATO decision continues then by outlining the passages of the Commentary that may support the view that a PE exists in this particular situation:
- Paragraph 4 of the OECD Commentary on Art. 5 of the OECD Model states that the term 'place of business' covers any premises, facilities or installations used for carrying on the business whether or not they are used exclusively for that purpose. Paragraph 4 also states that a place of business may exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. It is immaterial whether the premises, facilities or installations are owned or rented by the enterprise or are otherwise at its disposal.
- Paragraph 4.1 states that the fact that an enterprise has a certain amount of space available at its disposal which is used for business activities is sufficient to constitute a place of business. The space made available to the taxpayer when providing the services under the contract falls within the meaning of paragraph 4 and 4.1 of the OECD Commentary referred to above.
- Paragraph 5.4 of the OECD Commentary on Art. 7 of the OECD Model states that a consultant moving from one office to another within the same branch location remains in the same place of business. Similarly, the taxpayer remained in the same place of business even though the taxpayer moved within the one studio when utilising the premises of the Australian company.
- Paragraph 6 of the OECD Commentary on Art. 5 of the OECD Model provides that a PE can be deemed to exist only if the place of business has a certain degree of permanency and is not of a purely temporary nature. A place of business may, however, constitute a PE even though it exists, in practice, only for a very short period of time because the nature of the business is such that it will only be carried on for that short period of time.

For the above reasons, for the time the taxpayer provided the services under the contract in Australia, the studio was a specific location with sufficient geographic permanence; a fixed place through which the taxpayer carried on business.

In relation to temporal permanence, paragraph 6 of the OECD Commentary on Art. 5 of the OECD Model also provides that: (1) A PE will not normally be considered to exist in situations where a business has been carried on in a country through a place of business maintained for less than six months; (2) One exception to this is where the activities constituted a business that was carried on exclusively. This is on the basis that its connection with the country is stronger because the business is wholly carried on in that country.

Although the taxpayer carried on business from space made available at the studio for a period of less than 6 months, the taxpayer's place of business has sufficient temporal permanence to be a PE for the following reasons: (i) The nature of the business is such that it would only have been carried on in Australia while the taxpayer was providing the services; (ii) Under the contract, the taxpayer was obliged to provided his or her services exclusively; (iii) The provision of designing services were undertaken solely by the taxpayer even though it may have been possible for the taxpayer to sub-contract some elements of those services; and (iv) While the taxpayer was in Australia the activities constituting the business were undertaken exclusively within Australia.

Accordingly, while conducting business in Australia, the taxpayer was found to have a fixed base for the purposes of the treaty. Under the treaty, if the taxpayer has such a fixed base, income attributable to that fixed base shall be deemed to have an Australian source. Therefore, the income generated by the design services the taxpayer provided under contract will be taxable in Australia.

Final note: A PE issue (Art.5) is always followed by an attribution issue (Art.7). In fact, even though the ATO decision did not dealt with the issue of whether the full amount of the contract is then attributable to the fixed base in Australia, that appears to be the final result.