ATO in stand-off with US tech giants over transaction dispute

The National Foreign Trade Council’s head of international tax policy, Anne Gordon, described the measure as gross overreach and said the impact for its members, which include Microsoft, would be significant.

“I can tell you it is billions of dollars in transactions” that would be affected, Gordon said, without saying which members would be impacted. “For NFTC members, the revenue (tax) impact could be somewhere in the $US100 million range.”

Microsoft declined to comment.

The Tax Office has explained its reasoning for the change that has drawn so much ire.

“The ATO is concerned that some multinationals involved in software distribution have mischaracterised payments as a payment for a service (not subject to RWT), rather than as a payment for the use of intellectual property (and a royalty subject to RWT),” a spokesperson said.

The nub of the matter is that the Tax Office considers a software payment as a royalty – and subject to the withholding tax – where it is the “right to use any copyright or other kinds of IP”. It did acknowledge the pushback from the tech industry and its supporters.

Software used to come in a box with manuals, but its switch to being sold predominantly online has caught the ATO’s attention.Credit: AP

“The view of many stakeholders who made submissions to the ATO during consultation is that the payments are not royalties which would be subject to Australian RWT and are instead payments for services.

“The draft ruling was open for public comment until 1 March; we are currently carefully considering the responses we have received. We are grateful for the detailed feedback provided to us during the public consultation period,” the ATO said.

What is not known is if the US Treasury is still at odds with the proposed change.

In August 2022, a US Treasury Department official wrote to Australia’s top official in charge of Treasury’s corporate and international tax division, Marty Robinson, expressing its concerns over an earlier version of the draft ruling.

“We are concerned that the preliminary views expressed in the draft ATO ruling, if applied by Australia to interpret the US-Australia tax treaty, could lead to treaty disputes,” it said.

The US Treasury did not respond to inquiries. The Australian Treasury Department said the issue was a matter for the ATO.

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