Countries like Australia have long struggled to tax the global tech giants. Now, a new approach could significantly increase tax collected from multinationals such as Apple, Google, Microsoft and Amazon.
These companies earn significant revenue from Australian consumers. However, much of the profit is ultimately recognised overseas. Traditional tax rules have not kept pace with the way global businesses operate.
Over the last decade, Australia has introduced several laws targeting multinational tax avoidance and profit shifting. These laws focus on where profits are made, where they are shifted to, and where they are ultimately taxed. They are designed to prevent multinationals from shifting profits earned through sales to Australian consumers to an offshore location.
These measures have made it harder for multinationals to reduce their tax in Australia. But they don’t deal with all the ways profits are shifted offshore.
A new ruling by the Australian Taxation Office (ATO) takes a different approach.
Rather than focusing on the flow of profits offshore, it focuses on the character of cross-border payments for software made to overseas entities in the same corporate group. The ruling says some of these payments can be treated as royalties – and therefore taxed in Australia.
The scale of the problem
The scale of the Australian operations of US tech giants can be seen in the ATO’s latest corporate tax transparency data. It shows that Apple, Microsoft and Amazon were among the largest tech groups operating in Australia by total income reported.
Taken together, these three groups reported almost A$30 billion in total income for the 2023-24 income year, while their combined tax payable was about $478 million.
Imagine an Australian consumer pays $100 for a software subscription supplied by a global tech giant. An Australian subsidiary of the tech group may sit behind the transaction and receive the consumer’s $100 payment. It then pays $80 to an overseas member of the group for the right to distribute or use the software in Australia. Ignoring other costs, the profit is $20 for Australian tax purposes.
The new tax ruling potentially changes the tax consequences of the $80 payment. It says this payment may have a copyright or intellectual property element, meaning some or all of it could be considered to be a royalty payment. This matters because royalties paid to overseas companies can be subject to Australian royalty withholding tax.
Across the major tech firms, these extra taxes could amount to hundreds of millions of dollars.
US Treasury and trade groups object
The US Treasury has already raised objections during a five-year consultation process. Earlier drafts of the ruling were released in 2021 and 2024.
The US Treasury in 2024 urged the ATO to either withdraw the draft ruling or revise it to conform with international tax conventions.
The US position is clear. It argues these payments are not royalties and should be treated as business profits, making them taxable in the US. It views the Australian approach as a departure from international tax norms.
Significantly, different approaches to the same payment also create the risk of double taxation. If Australia treats the payment as an Australian-h company may not be able to obtain a tax credit and may be taxed twice
The Washington-based National Foreign Trade Council responded this week:
We are extremely concerned that the Australian Taxation Office (ATO) has decided to double down on its unprincipled approach to routine business transactions. This guidance continues to run counter to international tax norms, including unilaterally reinterpreting the US-Australia Tax Treaty.
The White House has also warned its trading partners against levying new taxes on its tech sector.
Is the ATO right?
Tech giants and the US may not agree with the ATO’s position, but its stance has merit.
Traditional rules for taxing royalties were developed decades before software was downloaded over the internet or accessed from the cloud. Modern software distribution can involve much more than simply buying a product overseas and selling it in Australia.
The ATO argues that it must go beyond the label placed on the arrangement and consider what rights are actually granted under the arrangement. This includes the grant of the right to reproduce software. Importantly, the ATO does not argue that every payment for software is a royalty.
The ATO’s position is effectively that the tax treatment of software payments should reflect the reality of modern transactions – and the way intellectual property is used and distributed in a digital business model.
Where to now?
The ATO says the ruling clarifies its views and provides certainty about the tax consequences of software payment arrangements. However, it recognises that ultimately, the rules may need to be clarified in the courts.
The views expressed in the ruling have to some extent already been tested in the courts. In a split decision in Australia’s High Court last year, the court ruled that transactions between PepsiCo and Schweppes were for beverage concentrate and did not include a royalty for the use of PepsiCo’s intellectual property.
Given the significant amounts of tax at stake – along with the strident US opposition – further litigation seems inevitable.
