Client Insight: Update on ATO COVID measures on Permanent Establishments

26 May 2021

In brief

On 12 May 2021, the Australian Taxation Office (ATO) updated its Taxation Ruling TR 2002/5 on Permanent Establishments (PE) to formally recognise the ongoing COVID-19 pandemic as an “extraordinary circumstance” where a forced presence of employees in Australia for more than six months may be considered “temporary” for the purposes of satisfying the temporal permanence requirement for foreign entities to trigger a PE in Australia. The ATO also updated its website on 25 May 2021 to confirm the extension to 31 December 2021 of its administrative guidance for foreign entities which may otherwise inadvertently create an Australian PE due to dislocated employees working in Australia as a result of the ongoing pandemic.

In detail

Foreign resident entities are generally not subject to most forms of Australian income tax unless they carry on business at or through an Australian PE. TR 2002/5 documents the Commissioner’s view on whether the presence of employees in an Australian location may constitute a PE of the employer in that location under the Australian domestic tax law. Broadly, for a PE to arise, there needs to be both geographical and temporal permanence in the business activities which the local employees undertake on behalf of their employer. 

The Commissioner notes in TR 2002/5 that although temporal presence is a matter of fact and degree, as a guide, if a business operates at or through a place continuously for six months or more that place will be temporally permanent. Prior to 12 May 2021, the ruling also noted that whilst it is “conceivable that in some circumstances a period of six months or more would not constitute temporal permanence ... the Commissioner is not aware of any practical examples of such circumstances.”

However, with the international travel restrictions implemented by the Federal Government to limit the spread of COVID-19, foreign entities risked inadvertently creating an Australian PE for income tax purposes (as well as triggering a range of other tax issues) from their employees having to work from Australia indefinitely and for extended periods. This was particularly pertinent to foreign entities which were Significant Global Entities (SGEs), as the creation of an Australian PE would impose additional tax filing obligations in Australia, of which late or non-compliance may result in very significant administrative penalties being imposed (up to $555,000 per document), even where the amount of taxable income otherwise attributable to the Australian PE is minimal.

Recognising this, the ATO from March 2020 progressively released administrative guidance on specific tax issues emerging as a result of the pandemic in an effort to provide certainty to taxpayers, including in relation to the issue of inadvertent creation of PEs in Australia. The administrative guidance on PEs was updated and extended several times, with the previous iteration (released February 2021) providing that the Commissioner will not apply compliance resources to determine if a foreign company has a PE in Australia where the following conditions are satisfied:

• the foreign company did not otherwise have a permanent establishment in Australia before the effects of COVID-19;
• the temporary presence of employees in Australia is solely 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; and
• the company has 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.

The previous guidance noted that it would be applicable until 30 June 2021, after which, foreign companies would be required to consider whether their ongoing arrangements give rise to a PE in Australia.

Given that international travel restrictions will in all likelihood extend into 2022, the ATO updated TR 2002/5 to formally recognise the ongoing COVID-19 pandemic as an “extraordinary circumstance” where a forced presence of employees in Australia for more than six months may be considered “temporary” for the purposes of satisfying the temporal permanence requirement for foreign entities to have a PE in Australia. 

The ATO has also updated its website to confirm the further extension of its administrative guidance to 31 December 2021.

These two developments provide much needed certainty and relief for foreign entities with employees in Australia. Formal recognition of the impact of COVID-19 in a Public Taxation Ruling also provides taxpayers with additional certainty and protection beyond administrative guidance. 

Taxpayers should be aware that these developments do not provide any relief if they would otherwise have a PE in Australia (such as carrying on business through a dependent agent). In addition, although an entity may not have a PE as a result of employees working in Australia, other obligations may arise such as Superannuation Guarantee contributions, PAYG tax withholding and reporting and compliance with State payroll tax.

The takeaway

These two developments provide welcome certainty for taxpayers who are managing the impact of dislocated employees and the other impacts of the pandemic. However, they should continue to monitor employee movements and ensure they would not otherwise trigger a PE in Australia into 2022.