Australia: Tax Ruling of Note
In an April decision, the Federal Court of Australia upheld an Australian Taxation Office (ATO) ruling holding IBM Australia Ltd. responsible for withholding tax on all payments that it had made to its U.S. parent under a software licensing agreement.
The case illustrates the critical importance of the language used in such agreements when it comes to how the ATO will treat them for tax purposes.
IBM and IBM Australia had entered into an agreement which provided IBM Australia with the rights to conduct IBM's business in Australia, regarding it as a distribution agreement and a software license. Under this structure, IBM Australia only paid withholding tax on 50% of the payments attributable to the IP license as royalties. In a potentially expensive lesson, the ATO disagreed, ruling that the payments constituted royalties under Article 12 of the Australia-U.S. income treaty and were therefore subject to withholding tax. The Court found that since the agreement granted to IBM Australia “such IP rights as are necessary for distribution” of computer programs, it was “not a distribution agreement which confers distribution rights independently of the grant of IP rights.”