In its dispute concerning whether distribution payments were “royalties” for Australian withholding tax purposes, the Full Court of the Federal Court of Australia allowed Oracle’s appeal and have the domestic proceedings stayed pending the Australia–Ireland mutual agreement procedure (MAP). From a practical perspective, this decision now enables Oracle to progress with the MAP process and hold the domestic appeal in abeyance.

Background

The stay proceedings arose as the Australian Commissioner of Taxation (Commissioner) made a decision to disallow Oracle’s objection concerning its cross-border taxation dispute despite agreeing to hold the objection in abeyance. The dispute was also pending resolution of a MAP under the double taxation agreement between Australia and the Republic of Ireland (DTA). This ultimately forced Oracle to file an appeal in order to preserve its rights to pursue domestic proceedings and have the matter heard before an Australian court.

The primary judge originally found in favour of the Commissioner and refused the stay application. This was on the basis that a determination of the Oracle matter by an Australian court was in the ‘public interest’. It would provide guidance on an issue that impacts a number of taxpayers as well as contribute to resolving a supposed disagreement between Australia and the United States concerning the ATO’s position on royalties.

Interaction between the DTA/MLI/domestic law

The Full Court’s unanimous decision to overturn the primary judge’s decision and allow the stay is a sensible outcome having regard to the operation of, and interaction between, the DTA / Multilateral Instrument (MLI) / domestic law. The Court’s reasons align with the treaty framework, namely that the DTA, as modified by the MLI, permits a taxpayer to invoke MAP: (1) “irrespective of the remedies provided by the domestic law”; (2) MAP may be suspended while a case is before a court; and (3) a domestic judgment can foreclose MLI arbitration. These features make a temporary stay a measured way to preserve the treaty route when domestic timelines force a filing.

“Public interest” and the royalty issue

The primary judge’s refusal of a stay rested on the conclusion that deciding Oracle’s case was in the “public interest” and would provide “guidance” that would address an issue (i.e., what constitutes a royalty) “lying at the heart of the affairs of the approximately 15 other taxpayers and the dispute with the United States”. The Full Court held that those conclusions stood on “slender evidentiary foundations” – in particular, the Commissioner’s evidence did not provide “the necessary factual foundation” that the Oracle case would “quell the controversy with the 15 other taxpayers”, nor would it necessarily “contribute to resolving the disagreement between Australia and the United States”. Rather, Oracle’s dispute is “anchored in the very particular circumstances” of the contracts between Oracle Ireland and Oracle Australia.

The Full Court explained that the royalty issue is fact-intensive and turns on domestic copyright concepts: whether payments were “made as consideration for … the use of, or right to use, any copyright” requires “an in-depth analysis of: the terms of the Distribution Agreements; the particular nature of the rights …; the arrangements in operation …; how those rights and arrangements are to be evaluated by reference to the Copyright Act; what the fees … are consideration for; and whether those payments are to be apportioned in any way”. The royalty characterisation question ultimately turns on the particular terms of the contracts between the parties.

Accordingly, the Full Court found that the primary judge’s factual assumption regarding broader ‘guidance’ for 15 other taxpayers and the dispute with the United States was an error of fact under House v R. As a result, the stay decision could not be upheld.

Practical impact for other taxpayers

Although, Oracle’s success may leave other taxpayers without immediate judicial guidance on the royalty issue, we consider that the decision is a sensible outcome having regard to the DTA / MLI / domestic law framework. From a practical perspective, taxpayers who have a cross-border taxation dispute (which is subject to MAP) can seek a stay of the domestic proceedings to allow MAP to proceed if the taxpayer is forced to commence domestic proceedings to preserve statutory appeal rights. Whilst taxpayers are not free to pursue MAP and domestic litigation simultaneously, the choice of remedy ordinarily remains with the taxpayer. The Full Court's decision preserves taxpayer choice and signals that a stay will often be appropriate to allow MAP to run where domestic timelines necessitate filing. The Commissioner ought to be wary of taking steps that force a taxpayer to either elect to bring domestic proceedings and risk the competent authorities suspending the MAP, or to forego their domestic appeal rights and rely solely on MAP.

The Full Court’s decision also supports the position that MAP is a genuine dispute resolution mechanism available to taxpayers under Australia’s DTAs. Within the international tax system, MAP can assist taxpayers to address double taxation and resolve international tax disputes. Whether MAP is an appropriate path to resolve a cross-border dispute compared to domestic proceedings depends on the facts and circumstances of each case. Taxpayers should carefully consider the pros and cons of pursuing MAP or domestic proceedings when seeking to resolve their taxation disputes.

Whilst this decision is principally concerned with process, the case demonstrates the Commissioner's continued focus on royalties and the ATO’s broader desire to bring this issue to a head before an Australian court, given it is an issue that lies at the heart of the affairs of a number of taxpayers. Taxpayers should therefore continue to be proactive and prepared given the Commissioner's appetite to challenge. In addition, the ATO’s finalisation of its Draft Taxation Ruling TR 2024/D1 (Income tax: royalties – character of payments in respect of software and intellectual property rights) will also need to take into account the Full Court’s observations regarding the royalty issue, as well as the recent High Court of Australia’s decision of PepsiCo.

Once final orders are made, the Commissioner will need to seek special leave to appeal to the High Court in order to set aside the judgement. We will provide further updates should the Commissioner apply for special leave to appeal.