Decision impact statement
International Business Machines Corporation v Commissioner of Taxation
Court Citation(s):
[2011] FCA 335
2011 ATC 20-256
(2011) 83 ATR 32
Venue: Federal Court of Australia
Venue Reference No: NSD 661 of 2009
Judge Name: Bennett J
Judgment date: 12 April 2011
Appeals on foot:No.
Decision Outcome: Favourable
Impacted Advice
Relevant Rulings/Determinations: Impacted Practice Statements:- Relevent Law Administration Practice Statements
Subject References:
Construction of contract
Copyright
Intellectual property
Royalties
Royalty Withholding Tax
Software licence agreement
Précis
Outlines the ATO response to the decision of the Federal Court which concerned the extent to which payments made under a software licensing agreement were royalties.
Brief summary of facts
The applicants were two non-resident corporations that received payments from IBM Australia Limited (a group subsidiary) under a Software License Agreement (SLA).
There was no dispute that at least some amount of withholding tax was due and payable in respect of the payments. The applicants accepted that the part of the payment attributable to intellectual property (IP) licences were royalties and therefore subject to withholding tax. The dispute arose over the contention, on the part of the Applicants, that the payments under the SLA were also in respect of rights not related to IP with the consequence that only a portion of the fees paid were royalties.
Issues decided by the court or tribunal
The issue decided by the court was whether the fees payable under the SLA were (as contended by the Commissioner) wholly royalties, or (as contended by the applicants) royalties only in part as per the definition of 'royalty' in Article 12(4) of the US / Australia Double Tax Agreement.
Under the Double Tax Agreement, royalty is defined to mean 'payments ... to the extent to which they are consideration for the use of or the right to use any (a) copyright, patent, design or model, plan, secret formula or process, trademark or other like property or right ...'.
The court held that the entirety of the fees payable under the SLA were royalties and gave rise to a liability to non-resident withholding tax.
The Court noted that the construction of the SLA is fundamental to the characterisation of the payments (para 11) and that to the extent that intellectual property licences were the subject matter of the SLA and the payments were for those licences they could properly be characterised as royalties (para 18).
The court rejected the taxpayers' construction of the agreement (which had been to the effect that it was primarily a distribution rather than software licensing agreement such that the fees paid under the agreement were primarily paid for a right to distribute). The Court held that the fees payable under the SLA had the character of payments for rights to use IP. This was so even if those rights are not exercised and regardless of the basis used to quantify the fees to be paid (para 44).
The Court observed that there was no ambiguity in the construction of the SLA (para 54). Moreover the Court noted that even if the terms of the SLA had been ambiguous, the extrinsic evidence that had been tendered by the taxpayers would not have supported the taxpayers' construction of the agreement (paras 61, 62).
The Court also agreed with the Commissioner's contention that the expression 'for the use of or the right to use' in the definition of 'royalty' means that the definition applies to payments both for the use of IP, that is, the exercise of the right granted, and also for the grant of the right to use the IP (para 14).
Tax Office view of Decision
The decision is largely case specific in that the decision turned on how the SLA entered into by the parties was to be properly construed. The decision does however provide a useful example of how a court goes about the task of construing an agreement which on its face relates to the licensing of software.
Administrative Treatment
Implications for ATO precedential documents (Public Rulings & Determinations etc)
Nil
Implications on Law Administration Practice Statements
Nil
Legislative References:
International Tax Agreements Act 1953
Article 12(4) of Schedule 2 (US/Australia DTA)
Income Tax Assessment Act 1936
128B(5A)
128C