Judgment summary
This judgment concerns an application by three Oracle group entities to stay their Federal Court proceedings so that a mutual agreement procedure (MAP) under the Australia-Ireland double taxation treaty, including possible arbitration under the Multilateral Convention (MLI), could proceed to finality first.
The underlying tax dispute concerns whether sublicence fee payments made by Oracle Corporation Australia Pty Ltd to Oracle CAPAC Services Unlimited Company (resident in Ireland) for the income years ending 31 May 2013 to 31 May 2018 constitute 'royalties' within the meaning of Art 13(3) of the Australia-Ireland Double Taxation Agreement (DTA), which would trigger Australian non-resident withholding tax liability.
Justice Perram dismissed the stay application in each of the three proceedings, with costs, but granted leave to appeal given the significance of the decision.
Background
The Applicants are all part of the Oracle group. Oracle CAPAC Services Unlimited Company ('Oracle Ireland') is resident in Ireland; Oracle Corporation Australia Pty Ltd ('Oracle Australia') is resident in Australia; Vantive Australia Pty Ltd ('Vantive') is the provisional head company of a sub-group associated with Oracle Australia [2].
Oracle Australia purchased enterprise software and hardware from Oracle Ireland and distributed these products in Australia under complex contractual arrangements, including sublicence fee payments for use of computer programs in which Oracle Ireland held copyright, made in the income years ending 31 May 2013 to 31 May 2018 [3].
For the income year ending 31 May 2013: an audit of Vantive commenced in April 2015; a notice of penalty of $25,876,525.80 was sent to Oracle Australia on 30 May 2018; a notice of non-resident royalty withholding tax was sent to Oracle Ireland on 26 June 2018; on 6 December 2019 the Commissioner decided not to remit the penalty; and Oracle Australia objected on 3 February 2020 [9].
For the income years ending 31 May 2014 to 31 May 2018: a further audit commenced in October 2019; a notice of penalty of $227,662,233.00 was sent to Oracle Australia on 23 March 2022, together with a decision not to remit that penalty; Oracle Australia objected on 20 May 2022; and a notice of non-resident royalty withholding tax was sent to Oracle Ireland on 17 June 2022 [10].
Oracle Ireland made a first MAP request to the Irish Revenue Commissioners on 18 May 2021 concerning the 2013 year [11]. On 8 September 2023 the Commissioner disallowed the objections for both periods, and Oracle Ireland lodged a second MAP request on 2 November 2023 concerning the 2014-2018 years [12]. Both requests were accepted by the Irish competent authority and were in progress; the ATO had provided its position paper on the first MAP [13].
The deadline to appeal the Commissioner's disallowance was 7 November 2023 under s 14ZZN of the Taxation Administration Act 1953 (Cth). The taxpayers filed the three proceedings on that date to preserve their appeal rights and immediately sought a stay to allow the MAP (and any arbitration) to proceed [14]. The ATO subsequently suspended the first MAP on 17 November 2023 and the second on 21 December 2023, under MLI Art 19(2) [15].
Core dispute
The question was whether the three proceedings should be temporarily stayed under s 23 of the Federal Court of Australia Act 1976 (Cth), pending conclusion of the mutual agreement procedure (and any resulting arbitration) under Art 26 of the DTA as modified by Arts 16 and 19 of the MLI [1], [18]-[20].
The parties agreed that a stay would amount to a 'suspension' of the domestic proceedings for the purposes of MLI Art 19(2), obliging the ATO to re-enliven the MAP, and the Commissioner confirmed he would do so if a stay were granted [17].
The dispute turned on whether the DTA and MLI machinery, properly construed under the Vienna Convention on the Law of Treaties and with reference to OECD Commentary, the Explanatory Statement to the MLI, and the Action 14 Report, contemplated that the taxpayer (rather than the Commissioner) should choose between pursuing domestic proceedings or the MAP, and whether other discretionary considerations, including guidance for other taxpayers and a dispute with the United States over the meaning of 'royalty', favoured refusing the stay [18], [33]-[46], [60]-[69].
Court findings
Perram J held that the discretion to grant a temporary stay is found in s 23 of the Federal Court of Australia Act 1976 (Cth), informed by the subject matter, purpose and scope of the DTA and MLI, both of which have the force of Commonwealth law [18]-[20].
His Honour found that the central purpose of the DTA is the avoidance of double taxation [33], and that the text of the DTA and MLI (including DTA Art 26(1), MLI Arts 16(1), 16(2) and 19(2), and the non-binding nature of MAP and arbitration outcomes on the taxpayer) indicated that a taxpayer should generally have access to both the mutual agreement procedure and domestic proceedings, and that it is ordinarily the taxpayer, not the competent authority, who chooses between these remedies [24]-[46].
The Court rejected the Commissioner's submissions that there was no utility in a stay because the MAP had already been suspended, and that the DTA and MLI did not intend to prevent a competent authority forcing an election between remedies [48]-[55]. The Court also rejected submissions that the ATO had acted in bad faith [78]-[81].
However, the Court identified strong discretionary considerations against a stay: approximately fifteen other taxpayers had software distribution arrangements raising the same 'royalty' characterisation issue [62], [65]; there was an ongoing dispute with the United States Department of the Treasury over the Commissioner's draft rulings (Draft TR 2021/D4 and Draft TR 2024/D1) on royalty characterisation of software payments, evidenced by correspondence dated 23 August 2022 and 5 April 2024 [63]-[64]; and, under MLI Art 23(1)(c), arbitral decisions carry no precedential effect and no stated rationale, so arbitration would not resolve the broader uncertainty or guide the Commissioner, other taxpayers, or negotiations with other treaty partners [66]-[67].
The Court also weighed, less heavily, that a stay could cause delay (potentially pushing final resolution to as late as 2029) and possible wasted effort if the taxpayers later rejected an arbitral outcome and reactivated the proceedings [68]-[69]. The Court found the strength of the taxpayers' position on the royalty question, and matters raised on both sides regarding the treaty machinery, to be of limited additional assistance once the wider public interest considerations were taken into account [70]-[81].
Balancing these matters, Perram J concluded that, but for the position of the fifteen other taxpayers and the dispute with the United States, he would have granted the stay [85]. However, the need for a final judicial determination of the meaning of 'royalty' for the benefit of the Commissioner, other taxpayers, arbitrators and other trading partners meant the stay should be refused on public interest grounds [83], [86]-[87].
Outcome
The Court dismissed the Applicants' claim for interlocutory relief (the stay application) in each of the three proceedings, with costs [Order 1, all three proceedings].
The Court granted the Applicants leave to appeal from that order in each proceeding, given the significant impact of the decision on the taxpayers and on the administration of the tax system [88].
Major issues / areas of contention
- Whether the Federal Court should grant a temporary stay under s 23 of the Federal Court of Australia Act 1976 (Cth) pending a mutual agreement procedure and possible arbitration under the Australia-Ireland DTA and the MLI.
- Whether the terms of the DTA and MLI indicate that a taxpayer, rather than the competent authority, generally chooses between pursuing domestic proceedings and the mutual agreement procedure.
- Whether the Commissioner's suspension of the mutual agreement procedure under MLI Art 19(2), following commencement of domestic proceedings triggered by a statutory time limit, was consistent with the treaty scheme.
- Whether refusal of the stay carried a risk of double taxation of Oracle Ireland, given the possibility of differing Australian and Irish interpretations of the royalty provisions.
- Whether the existence of approximately fifteen other taxpayers with similar software distribution arrangements, and an unresolved dispute with the United States over the meaning of 'royalty' in respect of software payments, favoured a judicial determination over resolution through arbitration.
- Whether the non-precedential and unreasoned nature of MLI arbitration decisions under MLI Art 23(1)(c) reduced the utility of allowing the mutual agreement procedure and arbitration to proceed first.
- Whether the ATO had acted otherwise than in good faith in suspending the mutual agreement procedure.