Does the mutual agreement procedure override domestic disputes?

Oracle Australia purchased software and hardware from Oracle Ireland and distributed these products in Australia. On review, the Australian Taxation Office (ATO) contended that Oracle Australia should have paid a royalty withholding tax of approximately AUD 253 million. To resolve the dispute, Oracle Ireland enlivened MAP, which was accepted by Ireland's Revenue Commissioners (IRC); however, this MAP process was then suspended by the ATO. 

In order to preserve its rights and to satisfy the timeframe to appeal the ATO’s position, Oracle Australia appealed to the federal court against the ATO’s position that withholding tax was applicable. Oracle concurrently applied for a temporary stay of the Australian proceedings to permit the MAP process to reach its conclusion.

On 31 October 2024, the Australian federal court rejected Oracle’s application to stay the Australian proceedings, meaning the MAP process that had already commenced under the Ireland-Australia tax treaty would be suspended. 

Currently royalties are a hot topic in Australia, with several litigation matters progressing through the courts. The high-profile nature of ongoing royalty disputes served as the primary reasoning for the federal court refusing the application in the Oracle case. The court acknowledged that, generally, domestic proceedings under a time limit should be stayed to permit the MAP process. However, the public interest in seeking a final appellant decision regarding the construction of a “royalty” under Australia’s tax treaties (i.e. whether software sublicence fees are royalties for withholding tax purposes) outweighed the grounds of the application. The federal court noted that a decision on whether distribution arrangements involved royalties would also assist in the conduct by the IRC and ATO of other MAP cases and any subsequent arbitrations. It would thus serve to clarify the options available for resolving the issues in dispute between the ATO and IRC.

Oracle has since appealed the decision of the federal court regarding the stay application, and the ATO has provided its view on the royalties issue in a draft ruling (TR 2024/D1). For now we will need to wait for further judicial guidance on this issue. 

This case makes clear that there is never any guarantee of relief from double taxation, even with a MAP in place. There are often several hurdles for taxpayers to overcome to seek and obtain relief in a particular case.

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Tony Nunes has over 25 years’ experience in providing tax advice to clients, especially on issues affecting cross-border transactions, acquisitions and restructures, and on all aspects of structuring the ownership and financing of corporations and their operations. 

Matthew Broadhurst has over six years of tax experience advising SME clients on tax-related issues. Matthew has an applied knowledge of managing tax disputes, including audits, objections, and litigation. He has worked in both the public and private sectors, and having advocated for the Commissioner and taxpayers in various disputes and litigation, he provides a unique outlook that is beneficial to clients navigating Australia’s taxation system.