Oracle’s $250m ATO tax battle to set precedent for tech royalties
A court has denied the American software giant’s stay application, ruling the dispute over royalty withholding tax payments must proceed in the public interest.
The Federal Court is set to use Oracle’s $250 million legal dispute with the ATO as a test case to determine Australia’s approach to taxing digital royalty payments after denying the American software giant’s request to stop proceedings on public interest grounds.
Oracle had sought to stay its domestic tax proceedings with the ATO pending the conclusion of a mutual agreement procedure (MAP) under the Australia-Ireland double taxation agreement (DTA).
Justice Nye Perram ruled the case should proceed through domestic courts rather than international arbitration, required by MAPs, as there was a need to establish legal precedent for at least 15 other multinational tech companies facing similar issues.
Justice Perram said the ATO’s current approach to royalties was “highly controversial” and causing diplomatic friction with the US. It was also “potentially emblematic of a larger dispute within the OECD about how royalties are to be approached in the case of software distribution arrangements”.
“Were it not for the position of the 15 other taxpayers and the dispute with the United States, I would grant the stay sought,” Justice Perram said.
Oracle is the third-largest software company in the world by revenue and market capitalisation, with clients including Microsoft, Google, Amazon and Nvidia.
The ATO claimed Oracle owes over $250 million in penalties, stemming from sublicense fee payments for software and hardware products purchased by Oracle Australia from Oracle Ireland between 2013 and 2018.
It submitted the payments qualified as royalties under the Australia-Ireland tax treaty and were subject to withholding tax.
Oracle, disputing the penalty notices, “enlivened” the MAP, which contains mechanisms for Irish and Australian tax authorities to resolve complaints between taxpayers relating to the DTA.
It also filed an appeal in the Federal Court on 7 November 2023 to “preserve their domestic rights” but immediately sought to have it temporarily stayed to rely on the MAP and arbitration progress instead.
The Federal Court considered laws like the DTA and the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, weighing Oracle’s right to access the MAP and the public interest in obtaining a definitive judicial determination on royalties.
Ultimately, Justice Perram refused the stay application, recognising the broader implications of this case for the tax system and other taxpayers.
“In the context of 15 other taxpayers whose circumstances seem to raise similar concerns, a dispute with at least one significant trading partner, and the potential for additional disputes with other contracting states in future, it would be useful to have a judicial determination of whether arrangements such as the present do or do not involve a royalty under the various double taxation treaties which exist,” he said.
“[This] speaks powerfully to the need for there to be a final appellate judicial determination of the issue.”
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