Royalty withholding tax uncertainty lingers for the tech industry as Oracle Case put on hold

The Full Federal Court has decided to pause Oracle Australia’s separate domestic legal proceedings while Australia and Ireland try to resolve the issue through a Mutual Agreement Procedure (MAP). 

What’s the underlying case about? 

The central question is whether payments made for the right to distribute software should be treated as “royalties” and therefore subject to royalty withholding tax. This is critical for Australian software distributors and foreign intellectual property (IP) owners, as it could mean significant tax liabilities. 

• The Australian Taxation Office (ATO) currently considers most cross-border payments for software distribution to be royalties, as set out in its Draft Tax Ruling TR 2024/D1. 
• Oracle Australia challenged the ATO’s decision and the large penalties for not withholding tax on these payments. At the same time, Oracle Ireland was pursuing MAP under the Australia – Ireland double tax treaty. 
• Oracle Australia applied to the Federal Court for a temporary stay of the underlying domestic proceedings to permit the MAP proceedings to reach its conclusion.  
• The Federal Court initially refused to pause the domestic proceedings, saying there was a public interest in getting judicial guidance. However, the Full Federal Court has now overturned this, ruling the dispute is highly fact-specific to Oracle’s contractual arrangements and won’t resolve the wider uncertainty for the industry.
• As a result, the court case is on hold until the MAP process between Australia and Ireland has run its course. 

Why does this matter for tech companies? 

The ATO is continuing to focus on the characterisation of software and IP payments for the tech industry however this delay means there’s still no clear court decision on whether payments for distribution of software are subject to royalty withholding tax. The ATO’s current views could result in significant tax exposure and penalties for businesses with similar arrangements. Until there’s more certainty, tech companies should: 

1. Review software distribution agreements and cross-border payment flows for rights acquired, especially any rights to use any copyright
2. Assess exposure to royalty withholding tax
3. Make sure of compliance with the latest ATO guidance
4. If under ATO review or audit, be aware of MAP rights and consider initiating MAP at the earliest opportunity. 

What is certain is that tax authorities are turning attention to intangible flows, software distribution and royalty streams. Unfortunately, there is no one-size-fits-all outcome and each arrangement needs to be reviewed on a substance over form approach.

What happens next? 

With the underlying domestic court case paused, it’s unclear when or if there will be a definitive answer on what constitutes a royalty for withholding tax purposes. The ATO may update its draft ruling TR 2024/D1, or the government could get involved if international trade issues arise. If you need support while we wait for further developments, contact our technology, media and entertainment, and telecommunications team.