Authors:
The recent Full Federal Court decision in Oracle Corporation Australia Pty Ltd v Commissioner of Taxation [2025] FCAFC 145 offers valuable guidance on a taxpayer’s right to pursue parallel proceedings under domestic law & the Mutual Agreement Procedure (MAP) under tax treaties, and situations in which public interest can override treaty obligations.
Background:
Oracle Australia paid intra-group license fees to Oracle Ireland for software licenses. The Australian Tax Office (ATO) classified these payments as “royalty” under both the Australian Income-tax Act and the Australia-Ireland tax treaty1. It held the payments were subject to withholding tax @10% under the treaty. Oracle challenged this assessment by filing objections before the Commissioner. Oracle Ireland had also initiated MAP under Article 26 of the Australia–Ireland DTAA. Oracle sought a stay of domestic proceedings to permit MAP to progress. The ATO suspended MAP, arguing that parallel proceedings could not continue2.
Oracle appealed this before the Federal Court and subsequently, the Full Federal Court.
Comparison of the rulings:
| Particulars | Federal Court | Full Federal Court |
|---|---|---|
| Date of Judgement | 31 October 2024 | 21 October 2025 |
| Judges | Justice Perram | Justice Hespe, Justice Button and Justice Younan |
| Observations on Taxpayer’s Rights | Justice Perram elaborated the general OECD-endorsed principle that taxpayers should not be forced to abandon MAP merely because they must file domestic appeals to meet statutory limits. He observed (para 82):“Generally speaking, in a case where a taxpayer has been forced to commence domestic proceedings to meet a time limit, proceedings should be stayed to permit the mutual agreement procedure (including any arbitration) to proceed if that is what the taxpayer wishes…. Denying a stay in such cases would effectively result in the competent authority being able to force the taxpayer to abandon one process.” | The Full Federal Court agreed with this view of Justice Perram and went on to state that DTAA and MLI explicitly envisage that domestic remedies and MAP may coexist, and taxpayers are not required to elect between them. The Commissioner’s act of suspending MAP upon the filing of domestic proceedings was inconsistent with Article 26 of the DTAA and Article 19 of the MLI, which allow a stay or suspension precisely to avoid such conflicts. |
| Public Interest Consideration | However, the stay was refused due to public interest considerations The “royalty” characterisation issue was of national significance, with potential implications for around 15 other multinational taxpayers and an ongoing dispute with the United States regarding software royalty treatment. Justice Perram reasoned that a judicial precedent would provide clarity and certainty that an unreasoned arbitral decision under MAP could not. Thus, Justice Perram found that public interest in obtaining a binding judicial ruling outweighed Oracle’s treaty-based procedural rights. | The so-called “public interest” was too speculative and there was no concrete evidence that Oracle’s case would resolve other taxpayers’ disputes or materially affect Australia’s treaty relations with the US. The Full Federal Court emphasized that the core issue was the interpretation of specific contracts and factual circumstances, not a broad legal principle of general application. Hence, it was not an appropriate vehicle for a public interest exception. Accordingly, the Full Federal Court allowed the appeal and granted the stay, permitting the MAP (and potential arbitration) to continue. |
Interestingly, it must be noted that even Justice Perram had recognised that:
- If a taxpayer files domestic proceedings only to preserve limitation periods, those proceedings should ordinarily be stayed to allow the MAP to continue; and
- The taxpayer, not the authority, should decide whether to pursue MAP or litigation.
However, he still refused to grant the say, reasoning that there was a “public interest” in having a judicial determination on the definition of “royalty” given that around 15 other similar disputes existed, and the issue overlapped with a broader treaty disagreement with the United States3.
On appeal, the Full Federal Court found this “public interest” concern was overstated. The Full Federal Court ruled that the evidence of public interest4 was not sufficient and “lack of challenge to evidence does not elevate that evidence”. Thus, it held that unless exceptional circumstances exist, domestic proceedings should be stayed to allow MAP to proceed.
Key Takeaways:
- A taxpayer who files domestic litigation due to statutory timelines can still pursue MAP.
- The correct procedural approach is to seek a stay of domestic proceedings to allow MAP to continue.
- The decision confirms that taxpayers are not required to elect between MAP and domestic traditional litigation; both can coexist, provided the domestic case is paused.
BMR Legal’s Observation:
While the Full Federal Court denied the argument on public interest argument for lack of evidence, it would have been interesting to see the outcome had there been credible proof that would the court have ruled the matter to be compelling enough for a public interest exception.
The Full Federal Court also observed that Australia’s judicial findings would not bind foreign tax authorities, underlining the limits of domestic precedents in cross-border tax disputes.
Relevance for India:
In a globalised economy, where countries assert sovereignty in treaty interpretation without always committing to binding dispute resolution, taxpayers often find themselves straddled with either years of uncertainty due to unresolved MAPs or onward appeals in Courts by the losing party. The alternative is for taxpayers to bear double taxation which leads to disproportionate tax costs of doing business.
Given that the State’s right to tax emanates from the Constitution and the facts courts have consistently held that where two interpretations are possible, the one favouring the taxpayer should prevail. In essence, it is fair for a taxpayer to adopt tax positions consistent with a reasonable interpretation of the law and binding treaty commitments of a country. The counterfactual cannot be that taxpayers must always take the most conservative approach to avoid controversy and double taxation – it is incumbent on the State to provide timely certainty to a taxpayer.
As the Full Federal Court observed, domestic court resolution does not bind the treaty partner. Dispute resolution under MAP has thus become critical for taxpayers as it provides legal certainty in both countries. A policy thrust on timely resolution under MAP would do wonders for ease of doing business in India.
1 The ATO held that the payment were royalties as defined by s 6 of the Income Tax Assessment Act 1936 (Cth) (1936 Act) and Art 13 of the Agreement between the Government of Australia and the Government of Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, signed on 31 May 1983, [1983] ITS 25 (entered into force on 21 December 1983).
2 A detailed analysis of the sequence of dates is provided at Para 28-44 of the Full Federal Court’s order. At Para 45(3), the Court observed “Although the formal request for a MAP for the 2014–2018 years was made after the objection decision had already issued on 8 September 2023, that bare fact (which was relied on by the Commissioner in argument on the appeal) obscures the history, which makes it clear that it was always apparent to all concerned that Oracle Australia wanted the 2014–2018 years also to be considered under the MAP. In February 2022, Oracle Australia had requested this be done and, for quite some time, the MAP process was being pursued on that basis — including by the ATO, whose position paper covered the 2014–2018 years, as well as the 2013 year — until it appears that it was realised that a separate process needed to be initiated.”
3 Reportedly, then Acting U.S. Treasury Deputy Assistant Secretary (International Tax Affairs), Scott Levine, sent a letter dated 5 April 2024 to the Australian Treasury First Assistant Secretary, Marty Robinson, highlighting issues with certain conclusions regarding the taxation of software royalties in the ATOs Draft Taxation Ruling TR 2024/D1 Income tax: royalties – character of payments in respect of software and intellectual property rights.
4 Para 77: The sum total of the evidence on the other 15 taxpayers is a single paragraph in the affidavit of the Commissioner’s deponent, Ms Spurge, an Assistant Commissioner. In her affidavit, Ms Spurge stated as follows:
The ATO is aware of approximately fifteen entities whose arrangements require consideration of the definition of a “royalty” for an [sic] Australian tax purposes in connection with software distribution and related arrangements for the purposes of their Australian tax affairs.
Para 78: The evidence went no higher and no further than the single sentence of Ms Spurge’s affidavit
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