The Federal Court has allowed a taxpayer’s appeal and held that payments it made to the IOC for broadcasting rights to the Olympic Games were not ‘royalties’ under the Australia-Switzerland DTA, and that it was not required to withhold amounts from the payments.
Seven Network Limited (Seven) made a series of payments between March 2006 and August 2008 to the International Olympic Committee (IOC) for the broadcasting rights to the Olympic Games.
- Those payments totalled just over id=”mce_marker”22m.
- The payments were consideration for the Signal Utilisation Deed, including the “use” of a signal, the ITVR Signal, which was used by Seven in its live television broadcasts in Australia of the 2004, 2006 and 2008 Olympic Games.
- The IOC is a resident of Switzerland and is subject to an unlimited tax liability in Switzerland.
- The Commissioner argued that Seven, an Australian resident corporation, was obliged to withhold part of the payments on account of the IOC’s liability for withholding tax.
After reviewing the matter, the Federal Court held that:
(i) each of the payments totalling $97.7m, made by Seven to the IOC pursuant to the Signal Utilisation Deed was not a royalty within the meaning of para 3 of Article 12 of the Australia-Switzerland DTA;
(ii) the taxpayer was and was not liable under s12-280 of Sch 1 to the TAA to withhold any amount from the amounts in dispute;
(iii) the taxpayer is and was not liable under s 16-30 of Sch 1 to the TAA to pay any penalty for failing to withhold as required by Div 12.
(Seven Network Limited v FCT [2014] FCA 1411, Federal Court, Bennett J, 22 December 2014.)
[LTN 1, 5/1/15]
Extract from Schedule 1 of the Taxation Administration Act 1953
12-280 Royalty payment to overseas person
An entity must withhold an amount from a *royalty it pays to an entity, or to entities jointly, if:
(a) the recipient or any of the recipients has an address outside Australia according to any record that is in the payer’s possession, or is kept or maintained on the payer’s behalf, about the transaction to which the royalty relates; or
(b) the payer is authorised to pay the royalty at a place outside Australia (whether to the recipient or any of the recipients or to anyone else).
12-300 Limits on amount withheld under this Subdivision
This Subdivision does not require an entity:
(a) to withhold an amount from a * dividend, from interest (within the meaning of Division 11A of Part III of the Income Tax Assessment Act 1936 ) or from a * royalty if no * withholding tax is payable in respect of the dividend, interest or royalty; or
(b) to withhold from a dividend, from interest (within the meaning of that Division) or from a royalty more than the withholding tax payable in respect of the dividend, interest or royalty (reduced by each amount already withheld from it under this Subdivision).
Extract from the Australia-Switzerland DTA as it stood at the time – [1981] ATS 5
1. Royalties arising in one of the Contracting States being royalties to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State.
2. Such royalties may be taxed in the Contracting State in which they arise, and according to the law of that State, but the tax so charged shall not exceed 10 per cent of the gross amount of the royalties.
3. The term “royalties” in this Article means payments (including credits), whether periodical or not and however described or computed, to the extent to which they are consideration for the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trade-mark, or other like property or right, or industrial, commercial or scientific equipment, or for the supply of scientific, technical, industrial or commercial knowledge or information, or any assistance of an ancillary and subsidiary nature furnished as a means of enabling the application or enjoyment of such knowledge or information or any other property or right to which this Article applies, or for the use of, or the right to use, motion picture films, films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, or for total or partial forbearance in respect of the use of a property or right referred to in this paragraph. [emphasis added]
Extracts from [2014] FCA 1411
15. The Commissioner, in his Notice of objection decision dated 2 December 2011 (Notice of Decision), concluded that the Amount is characterised as a “royalty” for the purposes of the Swiss Treaty as:
- the transmission of the footage of the relevant Olympic Games “via” the ITVR Signal was the transmission of a cinematograph film; or
- the transmission of the footage of the relevant Olympic Games “via” the ITVR Signal was the “use of, or the right to use, a property or right that is like a copyright”; or
- the transmission of the footage of the relevant Olympic Games “via” the ITVR Signal was use of, or the right to use, motion picture films or films for use in connection with television.
16. These are not identical to the bases of the Commissioner’s submissions in these proceedings.
…
158. For the above reasons, I am of the view that:
- The subject matter of the Amount is not a cinematograph film, and is it not a copyright or other like property or right.
- Τhe Amount is not a “royalty” within the terms of Art 12(3) of the Swiss Treaty.
- Seven is and was not liable under s 12-280 of Schedule 1 to the Taxation Administration Act to withhold any amount from the Payment.
- Seven is and was not liable under s 16-30 of Schedule 1 to the Taxation Administration Act for penalties for failing to withhold.
159. I consider that the Penalty Notices should be set aside.
Extracts from the International Tax Agreements Act 1953
Incorporation of Assessment Act
4. (1) Subject to subsection (2), the Assessment Act is incorporated and shall be read as one with this Act.
Note: An effect of this provision is that people who acquire information under this Act are subject to the confidentiality obligations and exceptions in Division 355 in Schedule 1 to the Taxation Administration Act 1953 .
(2) The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the Assessment Act (other than Part IVA of the Income Tax Assessment Act 1936 ) or in an Act imposing Australian tax. [emphasis added]
Earlier agreement with Switzerland
11E Subject to this Act, the provisions of the Swiss 1980 agreement, so far as those provisions affect Australian tax, continue to have the force of law:
(a) in relation to withholding tax–in respect of dividends or interest derived on or after 1 January 1979 and in relation to which the agreement remains effective; and
(b) in relation to tax other than withholding tax–in respect of income of the year of income that commenced on 1 July 1979 and of a subsequent year of income in relation to which the agreement remains effective.
Withholding Tax
17A(5) Section 128B of the Income Tax Assessment Act 1936 (which deals with liability for withholding tax) does not apply to the payment of a royalty as defined in subsection 6(1) of that Act if:
(a) the royalty is paid to a person who is a resident of a Contracting State or territory (other than Australia) for the purposes of an agreement; and
(b) the agreement does not treat the amount paid as a royalty.