Billionaire Larry Ellison, chairman of Oracle. Photo: David Paul Morris/Bloomberg
A federal court has delivered a blow to a bid by Australia to levy a large fine on the US multinational Oracle over how it uses an Irish subsidiary in its tax affairs.
The court has ruled that legal proceedings in the case should be paused to allow negotiations and arbitration between the Australian and Irish tax authorities.
Australia’s tax revenue had sought to impose a penalty of AUS$253m (€143m) on the subsidiary of Oracle over tax arrangements involving an Irish subsidiary. An earlier case had cleared the way for the penalty to be levied but Oracle had appealed this to the Federal Court.
The decision put a stay on proceedings is being seen as a win for Oracle and other large taxpayers with similar arrangements.
Oracle Ireland, which is tax resident in Ireland, held the rights to software but had an agreement with Oracle Australia, allowing it to sub-licence the software and sell it in that country for a fee.
The case revolves around whether the payments made by Oracle Australia to Oracle Ireland for sublicensing software were royalties under the Australia-Ireland double taxation treaty, meaning they would be subject to Australian withholding tax obligations.
Last year the Australian Taxation Office (ATO) issued a draft ruling indicating that the payments were royalties. It issued notices to Oracle Australia requiring it to pay a 10pc non-resident royalty withholding tax prior to it sending payments to Oracle Ireland.
Because Oracle Australia did not withhold this tax, the ATO issued penalty notices amounting to AUS$253m. Oracle Australia objected to this and Oracle Ireland triggered the mutual agreement procedure allowed under the Australia-Ireland tax treaty, meaning the tax authorities of both countries must now enter into negotiation and potentially arbitration.
In a note, accountants BDO said that the move by the tax authority to hit Oracle with a penalty “may have major consequences for many Australian software distributors and the foreign software owners.”
“Although the decision by the full Federal Court to grant the stay of proceedings is a win for Oracle and taxpayers in general, as it provides a precedent by allowing the MAP [mutual agreement procedure] to play out without domestic interruption from the ATO, taxpayers and advisers are still in a state of uncertainty on the underlying tax issue,” it said.
Oracle, which employs about 1,000 people in Ireland, was co-founded by billionaire Larry Ellison who is now executive chairman.