IBM resumes $55m Australian tax battle

IBM has resumed a two-year legal battle over a $55 million tax bill imposed on it by the Australian Taxation Office.

The case – filed by the US-based IBM Corporation, IBM World Trade Corporation, and local subsidiary IBM Australia  – was heard in the Federal Court this week.

IBM disputed a tax bill it received in June 2009 for unpaid royalty withholding tax, and interest, on fees paid to it by subsidiary IBM Australia from January 2005 to January 2009.

Under a 1987 software licensing agreement, IBM Australia paid 40 percent of its revenues to IBM in exchange for a bundle of rights that enabled the subsidiary to “use, distribute and market programs” created in the US.

The ATO submitted that fees IBM Australia paid to its parent company were in fact ‘royalties’ under the Double Taxation Agreement between Australia and the US.

Royalties were defined as payments for the use of “copyright, patent, design or model, plan, secret formula or process, trademark or any like property or right”. They were subject to withholding tax in Australia.

Counsel for Big Blue argued that only part of the fees paid by IBM Australia to head office could be classified as a 'royalty' - and therefore only that part should be subjected to withholding tax.

They argued that changes in software delivery mechanisms and Australian copyright law meant IBM Australia needed progressively fewer intellectual property rights, thus paying progressively less 'royalties' to head office, so less tax needed to be paid.

Justice Annabelle Claire Bennett noted that if the bulk of IBM’s fees were for royalties, as per ATO assertions, IBM Australia would likely have renegotiated its supply contract.

“If it’s all for copyright rights, why on earth would they keep paying that year after year when there’s no such requirement under Australian law,” she said.

The case was heard over two days. A decision was not expected for several months.