The Australian tax Office (ATO) issued a guide in September 2005 that explains how Australia’s permanent establishment (PE) attribution rules apply to a PE activity that arises through the activities of a third party (i.e., through a dependent agency PE). As a general matter, dependency agency status has come to the fore in transfer pricing issues as India and other countries seek to take a more stringent approach in applying PE status. Much of the ATO’s guidance titled “Attributing Profits to a Dependent Agent Permanent Establishment” is relevant inside and outside Australia.
Other countries in the region, including New Zealand and Thailand in particular, tend to rely on Australia transfer pricing developments. The ATO published this guidance in September 2005. We analyze these provisions here because the Organisation for Economic Co-operation and Development (OECD) addressed the same dependent agency PE profit attribution issues, and these OECD issues impacted the PE approach in 2010.
Australia generally provides PE rules in sections 136AE(4) through (7) of Division 13 of Part III of the Income Tax Assessment Act of 1936 (ITAA). The Business Profits Article in Australia’s double tax agreements determines PE status. Both the ITAA and the double tax agreements determine dependent agency PE status. Consider these two examples: