PATANA CONSTRUCTIONS LTD Procurements Proposal
Proposed Buying Options
January 2013
Patana Constructions Ltd –Procurements Proposal
• Business planning • Diagnostic analysis • Resource needs assessment
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Patana Constructions Ltd –Procurements Proposal
Table of Contents BACKGROUND ............................................................................................................................................ 1 Summary and recommendations ................................................................................................................ 1 BUYING AGENCY OPTIONS .................................................................................................................... 3 Establishing an Australian subsidiary (Patana Constructions Ltd) ........................................................ 3 Appointing an Australian buying agent (established Australian business) ............................................. 3 PNG TAXATION PERSPECTIVE ............................................................................................................. 4 Establishing an Australian subsidiary (of Patana Constructions Ltd) .................................................... 4 Appointing an Australian buying agent (established Australian business) ............................................. 5 AUSTRALIAN TAXATION PERSPECTIVE............................................................................................ 6 Establishing an Australian subsidiary (of Patana Constructions- PNG) ................................................. 6 Appointing an Australian buying agent (established Australian business) ............................................. 7 REFERENCES .............................................................................................................................................. 9
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Patana Constructions Ltd –Procurements Proposal
BACKGROUND Patana Constructions Ltd (PCL) is a diverse business group registered in Papua New Guinea (PNG) and engaged across the construction and real estate development sectors predominantly, with additional business enterprises in associated property maintenance including pool, landscaping and general facilities. The company wishes to procure its required supplies of materials from Australian manufacturers for products like building and maintenance hardware materials and industrial and domestic cleaning products to meet its various business consumables requirements. In order to procure these supplies PCL requires to establish an effective buying facility located in Australia from which to engage directly with its selected suppliers and coordinate the consignments of supplies to its head quarters located in Port Moresby, PNG. This assessment serves to provide PCL management with a set of options and a preferred recommendation for the establishment of this buying agency having regards to its requirements for effective taxation planning including the impacts of Goods and Services Tax (GST) on its procurement activities and also identifies additional associated costs and operational issues for consideration. The taxation implications component to this assessment is indicative only and is currently undergoing a review by a representative of the Australian Taxation Office (ATO) and therefore should not be fully relied on without further consultation with a professional accounting representative.
Summary and recommendations It is recommended that the preferred option for a sourcing agent be based on the selection of an Australian registered business or sole trader as commission agent due to the following likely outcomes: Sourcing all supplies through an Australian registered business or sole trader commission agent will avoid much of the operating expenditure involved with the option for an established subsidiary. From an Australian Taxation Office (ATO) perspective, there will likely be no GST tax liability on the agent services to PCL as this may be treated as an export related sale of services. Likewise there is likely to be no GST tax liability placed by the ATO on the supplies sourced, as these will also be treated as exports and therefore classified as GST-Free sales of goods. However PCL may still need to with hold tax (17%) from any payments made under this option, as this will likely be treated as “management fees� by the Internal Revenue Commission (IRC) in PNG. Further, PCL may also be required to gain pre-approve from the IRC for any such agency contract PCL makes with an Australian commission agent. The PNG authorities may also levy additional tariffs including GST (10%) on the Cost, Insurance, Freight (CIF) value of all imported products from Australia, in addition to other levies like duties and excise.
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Patana Constructions Ltd –Procurements Proposal
Establishing an Australian subsidiary to manage these procurements has the potential to place additional costs including ATO compliance, labor and general operating expenditure with servicing a base for operations. However there may be minimal taxation liabilities for PCL to ATO on declared profits (if any), with establishing a subsidiary due to the operating effects of the ‘Double Taxation Treaty’ (DTA) between Australia and PNG which acts to transfer taxation rights to PNG (IRC). From a PNG taxation perspective there may be liabilities placed on PCL through the IRC for the payment of “management fees” to an Australian subsidiary of PCL. This may require PCL to with hold tax (17%) from these payments and PCL will require to seek pre-approve from IRC in PNG for any such contract PCL makes with an Australian subsidiary. However the IRC may grant PCL entitlement to claim these fees against any declared profits or earnings lodged by PCL through the IRC in PNG. In general all the sourcing agency options identified operate across the same principles of sound commercial management on behalf of PCL to ensure that all supplied products meet PCL business requirements including price, quality, supply consistency and all relevant procurement specifications as required by PCL. Any sourcing agent chosen regardless, will merely intermediate between the Australian suppliers and PCL with the suppliers actually making the exports directly to PCL. In this regard, PCL will make direct payments to the Australian exporters and therefore avoid potential restrictions placed on the transfer of funds out of PNG as required by the Reserve Bank PNG. This analysis can be demonstrated in the table below which shows the avoidable costs that PCL benefits from through adoption of the preferred option for sourcing its supplies through an Australian registered business or sole trader. The additional establishment and ongoing operating costs for creating an Australian subsidiary is highlighted as red and classed as unavoidable from a PCL perspective. These same costs are highlighted as green and classified as avoidable from a PCL perspective if the preferred option for selecting an established Australian business or sole trader to conduct commission based sourcing agency serviced through, for PCL’s Australian procurements needs. Table: Preferred Sourcing Option
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Patana Constructions Ltd –Procurements Proposal
BUYING AGENCY OPTIONS Establishing an Australian subsidiary (Patana Constructions Ltd) Regardless of the option chosen, there are a number of buying or sourcing principles that must be delivered through the agent to PCL, including the ability to establish and manage the supplier relationships, knowing in detail the PCL business procurement requirements, working to an agreed schedule of product specifications and timelines and having the ability to negotiate the best outcomes for PCL in terms of product prices, quantity, quality and supply consistency. In addition any agent should work closely with PCL to fully manage a program of scheduled supply logistics through the Australian supplier and coordinate all shipments to PCL in accordance with pre-determined timelines and to product specifications. Any established subsidiary would be able to establish this level of service to PCL parent operations through company relationships and connections with the added advantages of having direct contacts with PCL management as required. Regardless of the options, any sourcing agent will require to act as intermediary between the Australian supplier/exporter and PCL and this means the supply model is based on having the Australian supplier manage the direct exports to PCL, but with coordination and oversight from the subsidiary office. This will mean that the Australian supplier/exporter invoices (GST-Free) all supplies to PCL and payments are made direct as per normal commercial procurement transactions. As an option, the subsidiary may facilitate these payments under direction from PCL, however it should be noted that the PNG Reserve Bank may place restrictions on the amount and frequency of PNG currency able to be transferred to the PCL subsidiary account at any time (PNGK20, 000) or annually (PNGK200, 000). From an Australian taxation perspective any subsidiary operations may need to fully comply with the ATO registration requirements for TFN, ABN, GST, PAYG, SUPER and associated registrations as well as meet some additional compliance costs (accounting) associated with any declared profits (if any) on the tax returns. In addition the subsidiary may place additional costs to PCL for labor regulations including superannuation, workers compensation, insurances, rental and all associated operating costs attributable to the managing of the subsidiary in Australia.
Appointing an Australian buying agent (established Australian business) The sourcing of PCL supplies through an Australian commission agent will operate along the same principles for sourcing management as previously outlined above, however there may be some additional cost advantages to PCL mainly delivered through reduced operating expenses of not having to service a subsidiary office in Australia. The preferred option for an Australian sourcing agent is to act as the intermediary in the legal sense from an ATO perspective meaning the commission agent merely manages the PCL procurements through liaisons between the Australian suppliers/exporters and PCL and all transactions for shipping and payments for goods occur between PCL and the suppliers/exporters. The performance capability must be demonstrated by the Australian agent to ensure best prices are negotiated, product specifications must meet PCL needs for quality, quantity and supply consistency and the agent must over see the entire procurement processes in liaison with both PCL and the Australian suppliers/exporters. Buying Agency Options Assessment Report
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Patana Constructions Ltd –Procurements Proposal
Key Procurement Criteria:
Product spec's (Price, Qty, Quality)
SupplierD irect exports
PCL Procurement Needs
Supplier capacity
Agent Mg't
PNG TAXATION PERSPECTIVE Establishing an Australian subsidiary (of Patana Constructions Ltd) Taxation on income earned (if any) through the subsidiary in Australia is treated under the DTA between Australia and PNG. In this case there may be no tax liability under the ‘Source’ country Australia, as the nature of the subsidiary does not likely constitute a ‘permanent establishment’ (PE). Simply stated, any income earned (if any) through PCL’s subsidiary in Australia resulting from its procurement activities will likely be taxed in PNG (30% resident rate), as there may be no existence of a PE of PCL in Australia. The IRC in PNG may likely place a GST levy (10%) on all procured supplies exported from Australia and imported into PNG, the value used for GST may include export CIF plus any additional tariffs including duties and excise taxes. In addition, the IRC may also require withholding tax (17%) to be deducted from any payments to an Australian agent / employee, classed as “management fees”. In turn the IRC may grant PCL an allowable deduction for these “management fees” (2% assessable income / allowable deductions). The Reserve Bank of PNG may place restrictions on the opening of an Australian bank facility and may also place restrictions on any cash amounts brought into Australia at any one time (PNGK20, 000) or annually (PNGK200, 000).
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Patana Constructions Ltd –Procurements Proposal
PNG Taxation implications:
GST *May apply from PNG side *Australian Imports (10%)
DTA
MGT FEES
*Acts to transfer taxing rights to PNG
*May apply to Australian agency paynents *Witholding (17%)
*Declared Earnings (30%)
IRC
Appointing an Australian buying agent (established Australian business) Broadly the IRC may require to pre-approve any contractual arrangements for an Australian based buying agent before PCL may engage such agent. The potential implications for such an arrangement from IRC perspective focuses in the payment by PCL to a foreign-based contractor of “management fees.” Accordingly, the IRC may require PCL to deduct withholding tax (17%) from any payments made under the contract to an Australian agent. In turn the IRC may grant PCL an allowable deduction for these “management fees” (2% assessable income / allowable deductions). Another potential implication to this option is the establishment of funds to manage the Australian procurements through payment facilities to Australian suppliers. The Reserve Bank of PNG may place restrictions on the opening of an Australian bank facility and may also place restrictions on any cash amounts brought into Australia at any one time (PNGK20, 000) or annually (PNGK200, 000).
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Patana Constructions Ltd –Procurements Proposal
AUSTRALIAN TAXATION PERSPECTIVE Establishing an Australian subsidiary (of Patana Constructions- PNG) Broadly, the Australian subsidiary for PCL may be considered as an Australian resident for income tax purposes and may be required to seek registration with the relevant agencies for an Australian Business Number (ABN), Tax File Number (TFN), Goods and Services Tax (GST), Pay As You Go Withholding (PAYG), Superannuation and Fringe Benefits Tax (FBT), amongst other requirements. PAYG and superannuation registration may apply in particular if the Australian subsidiary employs either an agent or an ordinary employee. The Australian registered subsidiary may also be required to lodge annually with the ATO via the ‘International Dealings Schedule’. Taxation on income earned (if any) through the subsidiary in Australia is treated under the ‘Double Taxation Treaty’ (DTA) between Australia and PNG. In this case there may be no tax liability under the ‘Source’ country Australia, as the nature of the subsidiary does not likely constitute a ‘permanent establishment’ (PE). Simply stated, any income earned (if any) through PCL’s subsidiary in Australia resulting from its procurement activities will likely be taxed in PNG (30% resident rate), as there may be no existence of a PE of PCL in Australia.
Double Taxation (Australia-PNG) Implications:
PNG-Taxation (Residence)
AustralianTaxation (Source)
Patana pays tax on its earnings from the Australian subsidiary (30%)
Patana not liable to pay tax on its Australian earnings (no PE) DTA operates to allocate tax rights to PNG
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Patana Constructions Ltd –Procurements Proposal
Generally any supplies of goods procured by PCL through its subsidiary in Australia is classed as a ‘supply of goods connected with Australia’ and normally treated as GST applicable, however these supplies may qualify as GST-Free due to their export nature. This ruling is subject to a number of conditions with the principle one being that these goods are for export from Australia to PCL. Further, the supplier/manufacturer in Australia needs to be the principle exporter for these goods to PCL and not the Australian subsidiary. If the supplies are treated as GST-Free exports to PCL then it’s likely that the Australian subsidiary will not be required to register for GST. Therefore it’s likely that the subsidiary may not be required to meet associated compliance costs and activities such as submitting Business Activity Statements (BAS) periodically, charging GST on any invoices issued within Australia (if any). Consideration will however need to be given to circumstances where the Australian subsidiary makes general business purchases that include GST and not being GST registered, will not be able to claim GST credits from the ATO through the BAS process.
PCL Subsidiary Model:
• Patana-Australian subsidiary • Intermediates procurements activities
Goods connected with Australia -GST-Free (Exports) • Australian suppliers • Direclty export goods to Patana-PNG
• Patana resident corporation-PNG • Makes direct payments to Australian suppliers
Non-Permanent Establishment
Foreign Controlling Party
Appointing an Australian buying agent (established Australian business) Due to the ‘supply of goods connected with Australia’ stipulation for GST-Free classifications on exports where only the Australian supplier is the direct exporter to PCL, the preferred option is therefore to structure the procurement relationship where the “resident agency” is the intermediary only. In such a structure the GST
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Patana Constructions Ltd –Procurements Proposal
liability may lie predominantly with the “non-resident principle” meaning PCL is likely to become principally liable for any GST. However the GST-Free operative nature of the exports of all procured supplies from the Australian supplier to PCL may create non-creditable acquisitions (GST-Free purchases/exports) by PCL from its Australian suppliers/exporters. This also may act to create the non-taxable supply (GST-Free exports) of agency services to PCL, meaning the Australian agent doesn’t include GST in any invoices issued for services (commissions). One other option for structuring the agency relationship where PCL is acting through its Australian based agent to procure its supplies, effectively making the resident agent the supplier to PCL. Broadly under the ATO rulings ‘Resident agents acting for non-residents’ this relationship is deemed as a “principle to principle” relationship and therefore may place GST liabilities onto the agent. However the GST-Free export nature of the supplies may create non-creditable acquisitions (GST-Free purchases) between the Australian “resident agency” to the “nonresident principle”. This also may act to create the non-taxable supply (GST-Free exports) of agency services to PCL, meaning the Australian agent doesn’t include GST in any invoices issued for supplied goods and services. Under both options, PCL will likely be only subjected to tax on earnings declared through its PNG taxation authority (30% resident corporation) along with GST (10%) on all declared imports of its Australian supplies. In addition the IRC may also require withholding tax (17%) to be deducted from any payments to an Australian agent, classed as “management fees”. In turn the PNG IRC may grant PCL an allowable deduction for these “management fees” (2% assessable income / allowable deductions).
Buying Agency Preferred Model:
PATANA
Australian Supplier *Direct exporter Australian (Resident) Agent *Intermediary
*Non-Resident Principle *GST-Imports (10%) *Mgt Fees WHT (17%) *PNG Tax (30%)
*GST-Free Supplies
*GST-Free Services
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Patana Constructions Ltd –Procurements Proposal
REFERENCES Australian Taxation Office, (2000), TR GSTR 2000/37, Goods and services tax: agency relationships and the application of the law, 13 December 2000, Canberra, Australia. Australian Taxation Office, (2001), GSTR 2000/31, Goods and services tax: supplies connected with Australia, 30 June 2000, Canberra, Australia. Australian Taxation Office, (2001), TR 2001/12, Income tax: Interpreting Australia’s Double Tax Agreements, 19 December 2001, Canberra, Australia. Australian Taxation Office, (2002), TR 2002/5, Income tax: Permanent establishment - What is ‘a place at or through which [a] person carries on any business’ in the definition of permanent establishment in subsection 6(1) of the Income Tax Assessment Act 1936?, 13 March 2002, Canberra, Australia. Department of Foreign Affairs and Trade, (1989), Australian Treaty Series 1989 No 3, Agreement between Australia and the Independent State of Papua New Guinea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, 24 May 1989, Canberra, Australia. Internal Revenue Commission, (2003), Goods and Services Tax Act 2003, Port Moresby, Papua New Guinea. Internal Revenue Commission, (1959), Income Tax Act 1959, Port Moresby, Papua New Guinea. Internal Revenue Commission, (2005), Practice Statement PS01/2005, Port Moresby, Papua New Guinea.
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