The Australian Taxation Office (ATO) has recently extended its relaxed compliance approach for determining whether a permanent establishment (PE) has been created by a foreign company until June 30, 2021. The guidance was released in response to the impact of the COVID-19 pandemic which has caused concerns for foreign employers with temporarily displaced employees in Australia.
Broadly, Australian income tax is payable should a foreign enterprise carry on business through a PE in Australia. A fixed place of business of an enterprise through which its business is wholly or partly carried on will generally constitute a PE. Generally, when assessing whether a PE exists in Australia, four conditions must be satisfied:
- there is a person acting on behalf of the non-resident enterprise in Australia.
- that person is not an agent of independent status to whom a paragraph of a Double Taxation Agreement provision applies.
- the person has authority to conclude contracts on behalf of the non-resident enterprise, and
- the authority is habitually exercised.
Understandably, foreign companies have expressed concern that employees displaced due to COVID-19 will impact their tax position due to potential PE exposure. The ATO has responded by stipulating that they will not apply compliance resources to determine whether a PE exists if:
- you did not otherwise have a permanent establishment in Australia before the effects of COVID-19.
- the temporary presence of employees in Australia continues to solely be as a result of COVID-19 related travel restrictions
- those employees temporarily in Australia will relocate overseas as soon as practicable following the relaxation of international travel restrictions.
- you have not recognised those employees as creating a permanent establishment or generating Australian source income in Australia for the purpose of the tax laws of another jurisdiction.
It is critical to note that this approach only applies until June 30,2021. As such, foreign companies must reassess their position in terms of permanent establishment exposure after the relaxed approach period has expired.