IBM has filed a case in the Federal Court against the Australian Commissioner of Taxation, disputing a $55 million tax bill it has received on royalties paid by its Australian subsidiary.
Last month, the Australian Taxation office sent a letter to the software and hardware giant and its subsidiary IBM World Trade Corporation requesting that they pay additional taxation amounts of around $26 million and $29 million for royalties IBM Australia had paid them from 1 January 2005 to 31 January 2009, according to court documents.
IBM had completed a software licensing agreement with its wholly owned subsidiary IBM Australia, which gave the subsidiary the right to licence programs for use by customers, use programs to raise revenue and to use the programs internally.
IBM Australia paid fees per copy of each program to its parent, which were taxed. At the end of 2006, IBM transferred its obligations to provide rights to IBM Australia under the service level agreement to another subsidiary, IBM World Trade Corporation.
In 2003, IBM began to pay a lesser royalty tax, 5 per cent of only part of the fees paid, in accordance with a binding private ruling that the Taxation Office had issued to IBM Australia in 2004.
The argument was that only some of the activities IBM Australia carried out involved using IBM's intellectual property rights or trademarks. Therefore, only the payments for those activities were subject to the royalty tax.
From 1 January 2005, IBM continued to pay the lesser amount on the basis that this same division of activities applied. In 2006, it also tried to get the tax back from the ATO which it had paid from 1987 to the end of 2002 on the basis that the ruling should have applied pre-ruling. Its application for a refund was turned down by the ATO.
Now the ATO wants the full tax on the royalties for the period from 1 January 2005. IBM has said in its application to the court that it seeks a declaration that only the fees IBM Australia pays that fit in the definition of a "royalty" in the Double Taxation Agreement between Australia and the United States be taxed.
Both IBM and IBM World Trade Corporation were residents of the United States and were entitled to the benefits of that Tax Agreement, according to the court documents.
IBM also sought an "order that the two letters of demand ... be set aside" as well as payment of legal costs. It has hired Allens Arthur Robinson to represent it.
The first directions hearing is scheduled for 9:30am, 3 August 2009.