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22 Jun 11 Payments were “royalties” for withholding tax purposes - Decision Impact Statement on IBM case

The ATO has issued a Decision Impact Statement on the Federal Court decision in International Business Machines Corporation v FCT [2011] FCA 335; 2011 ATC 20-256.

In that case, the Court held that the full amount of payments made by an Australian subsidiary (IBM Australia Limited) of the taxpayer (International Business Machines Corporation) under a software licence agreement (SLA) were “royalties” as defined in Article 12(4) of the Australia-United States of America double tax agreement, and were therefore liable to withholding tax.

In the ATO’s view, the decision is largely case-specific, in that the decision turned on how the SLA entered into by the parties was to be properly construed. The decision does, however, provide a useful example of how a court goes about the task of construing an agreement which on its face relates to the licensing of software.