Does the Mutual Agreement Procedure Override Domestic Disputes?

All of Australia's double tax treaties (DTAs) contain a Mutual Agreement Procedure (MAP) Article, obliging the two tax authorities to negotiate in an effort to resolve double taxation. Most of these articles have been modified by the Multilateral Instrument (MLI) to allow a taxpayer to present its case to the competent authority of either Contracting State. However, this does not guarantee taxpayers’ relief from double taxation, as Oracle recently discovered.

Oracle Australia purchased software and hardware from Oracle Ireland and distributed these products in Australia. On review, the ATO contend that Oracle Australia should have paid royalty withholding tax of approximately $253m. To resolve the dispute, Oracle Ireland enlivened MAP, which was accepted by Ireland's Revenue Commissioners (IRC), but this MAP process was then suspended by the ATO.

In order to preserve its rights and to satisfy the timeframes to appeal the ATO’s position, Oracle Australia appealed to the Federal Court against the ATO’s position that withholding tax was applicable. However, 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 Federal Court rejected Oracle’s application to stay the Australian proceedings, meaning that 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 reason for the Federal Court in Oracle refusing the application.  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 in respect of the stay application, and the ATO has provided its view on the royalties issue in a draft ruling (TR 2024/D1). Thus, 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 and that there are often several hurdles for taxpayers to overcome to seek and obtain relief in a particular case.