OECD's first BEPS recommendations

The Organisation for Economic Co-operation and Development (OECD) has released its first recommendations for a co-ordinated international approach to combat tax avoidance by multinational enterprises, under the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project. The recommendations address the following seven action points (BEPS reports) in the OECD BEPS Action Plan:

  • Addressing the tax challenges of the digital tax economy
  • Neutralising the effects of hybrid mismatch arrangements
  • Preventing the granting of treaty benefits in inappropriate circumstances
  • Countering harmful tax practices more effectively
  • Guidance on transfer pricing aspects of intangibles
  • Guidance on transfer pricing documentation, and
  • Country-by-country reporting.

An Explanatory Statement provides an overview of the seven BEPS reports and also describes the status of the reports in the context of the overall Project, including remaining technical issues and potential interaction with the remaining Project work to be carried out. It also outlines the next steps for the BEPS Project work. Participating countries have agreed on the feasibility of a multilateral instrument to streamline implementation of anti-BEPS measures and in January next year, will consider a draft mandate for an international conference so that a multilateral instrument could be negotiated. For further information see the PwC Tax Policy Bulletin.

Software distributor liable to pay withholding tax

In Task Technology Pty Ltd v Commissioner of Taxation [2014] FCAFC 113, the Full Federal Court dismissed the appeal by Task Technology Pty Ltd (Task) against the decision at first instance (see Task Technology Pty Ltd v Commissioner of Taxation [2014] FCA 38), where Justice Davies held that the payments made by Task to a Canadian resident company (CaseWare) were ‘royalties’ for the purposes of the Convention between Australia and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (Canberra, 21 May 1980) (the Canadian Treaty).

Task was the distributor in Australia of software developed by CaseWare. As found by Justice Davies, the software is a computer program consisting of source code, which causes accounting and financial data input into various templates used with the software to be output automatically in the form of financial and accounting reports. The template is used in conjunction with the software to enable information to be output in a form appropriate for the end user.

Task was licensed by CaseWare to market and distribute the software pursuant to ‘end user licences’, and to make copies of the software for distribution. It was also licensed to develop and supply templates for use with the software pursuant to ‘application template licences’. Task paid annual fees to CaseWare under its licensing arrangements with CaseWare, and in the period under consideration, the fees paid included a percentage of the software and template license fees that TFask charged its customers.

The Commissioner’s position was that the amounts paid to CaseWare were ‘royalties’ derived by a non- resident, and since Task had failed to withhold tax from the payments, Task was liable to penalty under section 16-30 of Schedule 1 to the Taxation Administration Act 1953. Task’s position was that the payments were not ‘royalties’, and that accordingly it was not liable to deduct tax from the payments. Task sought declarations from the Court to that effect.

It was common ground at trial that the payments were ‘royalties’ unless covered by Article 12(7) of the Canadian Treaty. That Article provided that, for the purposes of the Treaty, ‘royalties’ did not include “payments or credits made as consideration for the supply of, or the right to use, source code in a computer software program, provided that the right to use the source code is limited to such use as is necessary to enable effective operation of the program by the user”.

In dismissing Task’s appeal, the Full Court found that under the licence agreement with CaseWare, Task was not supplied with the source code, nor was it granted the right to use the source code. On this point the Court dismissed Task’s argument that a right to use the computer software program constituted a right to use source code in that program for the purposes of Article 12(7) of the Canadian treaty.

Since the payments made by Task were not in respect of the supply of or right to use the source code, the proviso in Article 12(7) did not apply and the payments were ‘royalties’.

This decision highlights the need to carefully consider cross border licence agreements to determine what payments made under the agreement relate to. Since tax treaties entered into by Australia with foreign jurisdictions often vary, the terms of the particular treaty then need to be reviewed to determine whether the payments made will be ‘royalties’, with resulting obligations to pay tax under the Australian tax system.