ATO Court Win May Force Rethink For OZ CE &N IT Companies
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As the ATO starts to probe transfer pricing in Australia, in particular the price those local subsidiaries of large consumer electronics and IT companies, pay for goods from their parent Company, a Federal Court judge has ruled as to how a local subsidiary should be taxed.

As the ATO starts to probe transfer pricing in Australia, in particular the price those local subsidiaries of large consumer electronics and IT companies, pay for goods from their parent Company, a Federal Court judge has ruled as to how a local subsidiary should be taxed.

In a major decision that may have ramifications for a number of Australian technologies Companies IBM Australia has lost a $55 million Federal Court case about how revenue paid to it by its Australian subsidiary should be taxed. The company is expected to appeal.

The US-based IBM Corporation, IBM World Trade Corporation and local subsidiary IBM Australia in July 2009 filed a lawsuit against the Australian Commissioner of Taxation over claims that it owed amounts of $26 million and $29 million on earnings from the Australian subsidiary in 2004 and 2005.

Under a 1987 software licensing agreement, IBM Australia paid 40 percent of its revenues to the US parent in exchange for the right to “use, distribute and market” software created in the US.

The company claimed a portion of these payments should not classified as revenue or royalties on which withholding tax would have to be paid.

However, Justice Annabelle Claire Bennett yesterday dismissed IBM’s claims, ruling that Big Blue was liable to pay withholding tax on the full amount. She also ordered that IBM pay the ATO’s legal costs.

A spokesman for IBM Australia said that company was reviewing its position. But the spokesman said: “Whilst IBM Corporation is disappointed with the court’s decision; it has fully complied with relevant tax laws, met all of its tax obligations, and will continue to do so”.