Clarity for Australian tax treaty disputes

Background to the Dispute

The dispute concerns interlocutory proceedings between Oracle and the Commissioner of Taxation. The substantive proceedings relate to the issue of royalties and the payment of withholding tax. These proceedings started as an appeal of a taxation decision made by the Commissioner. Oracle had 60 days from when the Commissioner issued the decision to object. If the domestic proceedings were not started, Oracle would have lost all review rights. Prior to the objection decision, Oracle had sought a resolution to the withholding tax payable on royalties, utilising MAP as per the Double Taxation Agreement of the Republic of Ireland and Australia (“the Treaty”). Oracle wanted a stay to the substantive proceedings, until the MAP had been resolved, but the Federal Court disallowed this application.

Full Federal Court Decision

The Full Federal Court allowed Oracle’s appeal to stay the substantive proceedings. The decision was predicated on the facts that many tax treaties, not just the Treaty with Ireland, contain a process for MAP. The Full Court held that Australia’s treaty obligations should override the domestic proceedings. Whilst acknowledging there are circumstances in which domestic proceedings should take precedence, these circumstances were absent in this case.

The Commissioner submitted that it was in the public interest to have substantive proceedings, however the Full Court held that the MAP should not be halted as:

1. the tax implications of royalties are fact specific to Oracle and a court decision in this Oracle dispute would not necessarily provide guidance in relation to other matters; and
2. the issue of public interest lacked foundation.

Key Takeaways

The chronology of events supported the notion that the Commissioner weaponised time limits on domestic proceedings to prevent Oracle using MAP. On this issue, the Full Court were critical of the Commissioner’s conduct.

The Commissioner has not appealed the decision. To this end we might never know the outcome on the substantive issues, as they may be resolved via the MAP. However, this decision potentially marks an end to the Commissioner using domestic time limits to circumvent treaty obligations.

Clients with cross-border tax issues should use MAP concerning the interpretation of a tax treaty. The Commissioner is obligated to engage in this process. To ensure that MAP is the primary avenue of resolution, clients should look to start the process as early as possible.

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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.