Overview
The Federal Court is cracking down on Australian companies paying license fees to offshore entities.
In a recent court hearing (Task Technology Pty Ltd v FCT [2014] FCAFC 113), the Federal Court confirmed that royalty withholding taxes were applicable for license fee payments made by an Australian distributor to its Canadian supplier.
The term royalty is generally defined to include any amount paid however described or computed, as consideration for the use of, or the right to use (amongst other things) any copyright, patent, design or model, plan, secret formula or process, trademark or other like property or right.
The Federal Court asserts that whether license fee payments by an Australian company to an overseas software owner represents a royalty or not (and therefore subject to withholding tax), will depend on:
- The nature of the payment by the Australian company and what rights (e.g. rights to make copies of the application) the Australian company has in relation to the software. In this regard, it is important to analyse the terms of the agreement between the Australian company and the software supplier.
- The wording of the Double Tax Agreement (DTA)
- How the use of the software is provided to the end user.
Specifics of the case
The Federal Court found that royalty withholding tax was applicable for payments made by an Australian distributor to a Canadian software supplier in accordance with its signed 'Distribution Agreement'. This is premised on the Canadian supplier not having a permanent establishment in Australia and as a result was not subject to income tax in Australia.
The signed Distribution Agreement (as noted in cl 2.2) granted the distributor the exclusive right (in Australia, New Zealand and New Guinea) to undertake the following:
2.2.1 market End User Licenses and Application Template Licenses;
2.2.2 make Copies of Licensed Software and CaseWare Documentation;
2.2.3 supply Copies of Licensed Software to End Users pursuant to End User Licenses and Application Template Licenses;
2.2.4 supply Copies of CaseWare Documentation;
2.2.5 supply Professional Services specified in Section 2.5.1 to End Users pursuant to Professional Services Agreements;
2.2.6 develop Application Templates for use by End Users;
2.2.7 supply Application Templates developed by Distributor to End Users pursuant to Application Template Licenses.
The Commissioner claimed that payments for the 'rights' listed above were classified as 'royalties' according to the definition of the DTA between Canada and Australia; as such, the payments were subject to royalty withholding tax.
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