Important royalty withholding tax decision

Introduction

The taxpayer, Seven Network Limited, has won a recent decision (22 December 2014) in the Australian Federal Court, Seven Network Limited v Federal Commissioner of Taxation (2014) FCA1411, which is significant to all broadcasters, particularly involving the delivery of live sport and other entertainment.

Briefly, the key issue raised in the case was whether certain payments made to the International Olympic Committee (IOC) by the Seven Network (one of Australia’s free-to-air television networks) for broadcasting rights to the 2004 to 2008 Olympic Games under a Signal Utilisation Deed, were  ‘royalties’ under Article 12(3) of the Australian/Swiss Double Tax Agreement (1981).

Nature of payments in dispute: Tax treatment

The payments in dispute AUD 97,742,609 were made between March 2006 and August 2008 and formed part of the consideration payable to the IOC under the Signal Utilisation Deed. The payments in dispute were described as being for the International Television Signal (ITVR Signal) for use in connection with Australian broadcasting during the Games period.

The nature of the ITVR Signal (data stream) and how the Seven Network received that signal were critical in the decision. The data in the ITVR Signal could only be converted to television coverage by use of the appropriate receiving device.

While other payments to the IOC under the Signal Utilisation Deed were accepted by the parties as being “royalties” under the Australian/Swiss treaty (including payments for use in connection with delayed broadcasting of the Games after the Games period and for use of the IOC approved Olympic Marks/Olympic Rings), the parties contested the applicability of royalty withholding tax to the payments in dispute, forming approximately 80 percent of the total payments under the Signal Utilisation Deed.

The Australian/Swiss treaty describes a royalty as, amongst other things, payments made as consideration for the use of or the right to use any copyright or other like property or right.

It was Seven Network’s submission that the only copyright that comes into existence is that which exists in Seven’s broadcast, made with the benefit of the ITVR Signal. Further, there is no copyright in the ITVR Signal that is not embodied in an article or thing and it cannot be reproduced or reduced to a material form. In addition, there is no time when the aggregate of visual images is present in the ITVR Signal. There is no image or sound recorded in the signal and there is no physical form to an image or sound. Further, there is no capacity for reproduction from the ITVR Signal. Most importantly, the receiving device produces the sounds and residual images from the data stream.

Decision

Bennett J in summary held that the payments made to the IOC were not a cinematograph film and not copyright or other like property or right. These rights are only limited to Australian statutory rights ie. copyright.

Australian/Swiss Double Tax Treaty – ‘royalty’ definition

It is important to note that the Australian/Swiss treaty has recently been revised and that the 2013 version following Royal Assent replaced the 1981 agreement by entering into force in Australia on 14 October 2014.

However, the definition of “royalty” was not materially changed in the 2013 treaty in this context and contains a similar definition (in article 12.3) as used in many of Australia’s other double tax treaties, including with the US and the UK.

Accordingly, the Seven Network was not liable for royalty withholding tax on the payments in dispute to the IOC, however royalty withholding tax was payable on the other payments referred to above. The rate of withholding tax was limited to 10% under the 1981 treaty but has been reduced to 5% under the 2013 treaty.

Conclusion

We are not currently aware whether this decision will be appealed by the ATO but it is expected given it is a single judge decision of the Federal Court, the significant precedent value and the potential revenue cost/risk.

Finally, the case highlights the critical importance of appropriate drafting and describing the intellectual property and related rights associated with licensing and other international agreements, particularly involving the delivery of live sport and other entertainment.