Royalties in Australia : Task Technology and Seven Network Cases

The case law in Australia on the interpretation of the definition of royalties under tax treaties is not in a very satisfactory state. In particular in a sample of four judgments in recent years the decisions with one exception seem to avoid coming to grips with the OECD Commentary on royalties and its implications. Even more oddly the ATO does not seem to push the Commentary in the cases and allows them to be debated largely on contract and intellectual property issues. It is also difficult to predict how the Federal Court of Australia will respond to arguments based on the OECD Commentaries because of significant differences in approach to interpretation of tax treaties by the judges.Even if the ATO were to push the OECD Commentary on royalties more in the cases, the constant narrowing of the concept by the OECD through interpretation since 1992 means either that the ATO is likely to lose the cases or that the taxpayers concerned can restructure their arrangements to avoid the characterisation of payments as royalties. It is not surprising that the international tax system has come into disrepute in the area of intellectual property in recent years, though not just because of the interpretation of the definition of royalties but also because of the unsatisfactory state of the transfer pricing treatment of intangibles. The definition of royalties is an important element in the debate between countries over residence and source taxation and there is little sign of that debate being resolved in the near future