Technical Update
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Full Federal Court pauses Oracle royalty tax case: Continued uncertainty for the Australian Software Industry

 

The Full Federal Court has agreed to pause separate court proceedings for the Oracle group while a Mutual Agreement Procedure (MAP) with Ireland is underway.

The underlying tax issue in this case is in relation to whether payments for software distribution rights are considered to be royalties and therefore subject to royalty withholding tax. This is a contentious issue on which the Australian Taxation Office (ATO) has issued a Draft Tax Ruling (TR) 2024/D1, indicating that it is the ATO view that payments on most such software distribution arrangements are royalties. The ATO’s view in TR 2024/D1 may have major consequences for many Australian software distributors and the foreign software owners.

While the reasons for Federal Court decisions are generally made available to the public, the reasons for the MAP decision will not be published and will provide little to no guidance for other taxpayers . Although the decision by the Full Federal Court to grant the stay of proceedings is a win for Oracle and taxpayers in general as it provides a precedent by allowing the MAP to play out without domestic interruption from the ATO, taxpayers and advisers are still in a state of uncertainty on the underlying tax issue.

Case overview and key tax issues

The case focused on three companies within the Oracle group:

  • Oracle Corporation Australia Pty Ltd (Oracle Australia): An Australian tax resident and the first appellant in the case
  • Vantive Australian Pty Ltd (Vantive): An Australian tax resident, and the head company of a consolidated group including Oracle Australia. Vantive is the second appellant in the case
  • Oracle Capac Services Unlimited Company (Oracle Ireland): An Irish tax resident and the third appellant in the case.

Oracle was a software distributor that had the rights to distribute software, and associated rights, from Oracle Ireland in Australia. Oracle Australia and Oracle Ireland entered into two key agreements which allowed Oracle Australia to market, distribute, and sell software licenses, and to use the software for demonstrations, training, support, and internal purposes. In return, Oracle Australia paid fees to Oracle Ireland, calculated based on revenue and costs.

The ATO considered the fees paid by Oracle Australia to be ‘royalties’ within the meaning of Art 13(3) of the Australia-Ireland Double Tax Agreement (DTA), and therefore subject to royalty withholding tax (RWT). The ATO issued notices of non-resident royalty withholding tax to Oracle Ireland. If the payments were indeed royalties, Oracle Australia would be required to withhold a 10 per cent tax prior to sending the payments to Oracle Ireland. As Oracle Australia did not withhold the royalty withholding tax, the ATO issued penalty notices to Oracle Australia amounting to approximately $253m for failing to withhold amounts from the payments the ATO alleged were royalties.

The broad counter-arguments from the taxpayer group included that:

  • The rights granted were merely ‘simple use’ rights, not royalty-generating rights
  • The payments were not for the use of copyright, or if so, this was merely minimal
  • Even if some portion of the payments were royalties, that the payments should be apportioned and not taxed in full.

Oracle Australia objected to the penalty assessments and Oracle Ireland triggered the mutual agreement procedure (MAP) in the DTA, as amended by Art 16 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The MAP process involves negotiation between the Irish and Australian tax authorities to resolve the dispute and if not resolved, subsequently be submitted to an arbitration process.

Oracle Australia requested the ATO delay the finalisation of the objection until the conclusion of the MAP proceedings. The ATO did not agree and finalised the objection decision.

Oracle Australia appealed the disallowance of its penalty objections to the Federal Court within the 60-day time limit, thereby retaining its appeal rights. 

However, as Oracle Australia appealed to the Federal Court under the MLI rules, the ATO could suspend the MAP.

Oracle Australia therefore applied to the Federal Court for a temporary stay of the underlying Federal Court proceedings to permit the MAP proceedings to be reinstated and reach its conclusion. 

Federal Court decision

In October 2024, the Federal Court refused to stay the appeal proceedings and to allow the Federal Court proceedings in relation to the penalties to continue. This decision was ostensibly because public interest required a judicial determination of what is a royalty for the purposes of various DTAs (Oracle Corporation Australia Pty Ltd v FCT [2024] FCA 1262, 31 October 2024).

The Federal Court considered that generally, the terms of Australia's DTAs indicate that where a taxpayer has been forced to commence domestic proceedings to meet a time limit to protect its appeal rights, proceedings should be stayed to permit the MAP to proceed. However, the Court ultimately denied the stay of proceedings to allow for the MAP completion due to public interest reasons. 

The ATO argued that the public interest reasons concerned approximately 15 other entities whose distribution of software or related arrangements requires consideration of the definition of royalty for Australian tax purposes. Moreover, the ATO's approach to what constitutes a royalty for the purpose of Australia's DTAs had created discord with the USA Treasury, which had expressed concerns with the ATO's approach to the definition of royalties in software distribution. The US position was that such payments were to be treated as payments in exchange for services which were not royalties. 

The Court noted that while MAP could resolve double taxation disputes, it was non-binding on a taxpayer. This could result in ongoing uncertainty if Oracle rejected the MAP outcome. However, a judicial determination offered finality and established a precedent, benefiting both taxpayers and the ATO. Therefore, the Federal Court held that the stay of proceedings should not be granted.

The Oracle entities appealed this decision to the Full Federal Court. 

Full Federal Court decision

On 21 October 2025, the Full Court of the Federal Court of Australia handed down the appeal decision in Oracle Corporation Australia Pty Ltd v Commissioner of Taxation [2025] FCAFC 145.

In this Full Federal Court decision, the Oracle entities successfully appealed against the Federal Court's decision to refuse their application for a temporary stay of proceedings.

In overturning the Federal Court’s decision, the Full Court found that it was not open to the single judge to conclude that a stay was in the public interest. The Federal Court erred in accepting the Commissioner's submission that refusing the stay would provide a judicial determination that would provide guidance on what constitutes a royalty under Australia's various DTAs. The ATO’s evidence supporting that submission did not provide the necessary factual foundation for the finding. The dispute between Oracle and the ATO was anchored in the specific circumstances of the contracts between Oracle Ireland and Oracle Australia. The ATO’s evidence provided no foundation for the conclusion that the affairs of the 15 other taxpayers were such that judicial determination of the current taxpayers’ proceedings would quell the controversy with the 15 other taxpayers, or materially contribute to its resolution by offering guidance on a common principal issue.

The Full Federal Court also made the following salient points in overturning the Federal Court decision:

  • As taxpayers cannot pursue a MAP and domestic court or tribunal proceedings simultaneously, the choice of remedy should remain with the taxpayer. The effect of the ATO’s approach in issuing the objection decisions and then opposing the grant of a stay was that the taxpayers were required to abandon one of the two options. This was not what the DTA and the MLI contemplated
  • The Full Federal Court acknowledged that the treatment of payments by software distributors was a controversial issue. However, the tax controversy was mired in the facts of the specific arrangements between Oracle Australia and Oracle Ireland
    • In this context, the Full Federal Court noted that the High Court’s recent decision in Commissioner of Taxation v Pepsico Inc [2025] HCA 30; (2025) 99 ALJR 1211, the question of whether payments under particular contractual arrangements were partially a royalty turned on the terms of the contracts between the parties. Also the decision in International Business Machines Corporation v Commissioner of Taxation [2011] FCA 335; (2011) 91 IPR 120, which in determining if payments were royalties relied on the facts of the case, the terms of the contracts between the parties, and the nature of their arrangements. In the present case, there was no basis to conclude that determination of taxpayers’ proceedings would “shed meaningful light on whether the ‘arrangements’ of 15 other taxpayers said …..[by the ATO]…….. to involve ‘software distribution and related arrangements’” constituted royalties for Australian tax purposes
  • There was no basis to conclude that a domestic court decision would resolve any diplomatic disagreement with the United States regarding the interpretation of royalties. While the ATO would be bound by the Court’s decision, there was no basis to suppose that the United States Treasury would accede to the Court’s view in these proceedings.

The Full Federal Court considered that the Federal Court decision not to stay the proceedings could not stand. The Full Federal Court allowed the taxpayer’s appeal and ordered that there should be a stay of the relevant proceedings until the MAP was concluded (including by any arbitration).

Next steps

As the underlying Oracle Federal Court case has been stayed, the prospect of judicial guidance on whether software distribution arrangements involve royalties and withholding tax in the short term has receded. We now await to see whether the ATO will finalise or amend Draft Tax Ruling TR 2024/D1. Alternatively, as there are important international trade issues that could result from the ATO’s view, it will be interesting to see whether the Federal Government or Treasury may intervene.

How BDO can help

Should you have any questions regarding how this Full Court decision may impact your organisation, please contact your BDO tax adviser for further guidance and visit our tax services page to see how we can help. 

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