Background

On 21 October 2025, the Full Court of the Federal Court of Australia handed down its long awaited decision in Oracle Corporation Australia Pty Ltd v Commissioner of Taxation [2025] FCAFC 145 in which Oracle successfully appealed against the Federal Court's decision to refuse its application for a temporary stay of proceedings under Part IVC of the Taxation Administration Act 1953 (Cth) in the Federal Court of Australia.

The stay proceedings became necessary as the Commissioner of Taxation (Commissioner) made a decision to disallow Oracle's objection, notwithstanding the matter was pending resolution of a Mutual Agreement Procedure (MAP) under the double-taxation treaty between Australia and the Republic of Ireland (DTA) and the Commissioner had previously agreed to suspend the objection process.  This forced Oracle's hand, requiring Oracle to file an appeal in order to preserve its future right to judicial review.

The heart of the dispute was whether Oracle could stay its own application before the Federal Court under Part IVC of the Taxation Administration Act 1953 (Cth) whilst the matter proceeded under MAP.  In finding in favour of the Commissioner in the Federal Court, Perram J balanced the considerations for and against staying the Part IVC proceedings and found that balance favoured the Commissioner of Taxation, opining that there is "the need for there to be a final appellate judicial determination of the issue" and that such a determination "will provide guidance to the various competent authorities, to the other taxpayers, to arbitrators and to any other trading partners with whom the Commonwealth is presently in dispute about the nature of a royalty".

Justices Hespe, Button and Younan unanimously found that it was not open to Perram J to conclude that a stay was in the public interest.  The basis of that finding was that the Federal Court erred in accepting the Commissioner's submission that refusing the stay would provide judicial determination that provides guidance on what constitutes a "royalty" under Australia's various double taxation agreements and that the state of the evidence in support of that submission was elevated beyond its foundation.

The Decision

The central question was whether to allow a stay to domestic proceedings to allow the MAP to run its course, in circumstances where the taxpayer is compelled to litigate to preserve rights within strict statutory time limits.

At the Federal Court, Perram J refused the stay, citing public interest in a judicial determination that could provide guidance for the Commissioner and other taxpayers.  The Commissioner filed an affidavit from an Assistant Commissioner stating that there were approximately 15 other taxpayers with cross-border software issues under review by the Commissioner.  The Commissioner also put into evidence some letters from the United States Treasury whereby concerns were expressed with the ATO's approach to the definition of “royalties” in software distribution, as set out in its draft rulings.

The Full Court overturned Justice Perram's decision, holding that:

• the supposed public interest in judicial guidance for other taxpayers and international disputes was not supported by evidence. The Court found that the Oracle dispute was highly fact-specific, dependent on the particular contractual arrangements, and not necessarily representative of other cases.  Perram J found that he would have allowed the stay but for this fact.  The Full Court agreed with Perram J's analysis of the other factors supporting a stay, which were not in dispute, and therefore allowed the appeal.
• the DTA and the Multilateral Instrument (MLI) anticipate that taxpayers may pursue both MAP and domestic remedies. The choice of remedy generally remains with the taxpayer;
• the Court observed that the Commissioner's submission, that he was duty bound to issue objection decisions not withstanding MAP, was an ill-conceived submission to divert attention from the fact that the Commissioner had decided to take a step that would force Oracle to elect either to bring domestic proceedings and risk MAP being suspended or forever forgo its domestic appeal rights and place all their eggs in the MAP basket; and
• there was no basis to conclude that a domestic court decision would resolve any diplomatic disagreement with the United States regarding the interpretation of "royalties", which is primarily a matter for executive government and international negotiation.

The Full Court reiterates the message from the recent High Court of Australia decision in PepsiCo, that royalty matters turn on a detailed analysis of the specific terms of particular contractual arrangements between the parties.

Breaking it down, the relevant issues to consider include:

• the terms of the underlying agreements under which payments may, or may not, be made for the use of, or right to use, any copyright;
• the nature of rights acquired by a taxpayer under contractual agreements;
• the factual arrangements in operation between an Australian taxpayer and a related offshore entity;
• how those arrangements are to be evaluated by reference to the terms of the relevant copyright legislation;
• what fees paid by a taxpayer are "consideration for"; and
• whether any fees paid are to be apportioned in anyway, where part of the payment relates to an embedded royalty.

Practical Implications 

This decision is highly relevant for all clients in tax treaty jurisdictions with cross-border arrangements involving the potential for double taxation. In particular, it will be particularly relevant for taxpayers who may face similar withholding tax disputes, especially where payments are made under complex software or IP licensing agreements (this would include technology companies, pharmaceutical companies and most multinationals engaged in inbound distribution arrangement and/or licensing intellectual property into Australia). Key implications include:

• Preserving Rights: Taxpayers who must commence domestic proceedings to preserve statutory appeal rights who are simultaneously pursuing MAP, can seek a stay of the domestic proceedings to allow MAP to proceed, rather than being forced to choose one path and abandon the other.
• MAP as a Viable Option: The Court reaffirmed that MAP is a legitimate and accessible dispute resolution mechanism under Australia’s treaty network, and should not be sidelined by procedural manoeuvres.
• Fact-Specific Outcomes: The Court cautioned against assuming that judicial determinations in one taxpayer’s case will provide broad guidance for others, especially where arrangements differ in detail. This is particularly the case, given the Commissioner will be precluded from divulging too much information about other taxpayers' disputes in Court having regard to the confidentiality provisions in Division 355 of Schedule 1 to the Taxation Administration Act 1953.
• The use of Australia's anti-avoidance provisions: The ATO's MAP policy makes clear that an Australian competent authority cannot resolve a case under MAP to the extent that it involves the application of Part IVA. Practically, this means a taxpayer can technically make a MAP application, however the Australian competent authority will not progress the application / engage in negotiation.  Importantly, for treaties including arbitration clauses, Australia also has an express right to exclude cases from arbitration to the "extent that it involves the application of Australia's general anti-avoidance rules contained in Part IVA".  The ATO's guidance states that these exclusions extend to cases involving the multinational anti-avoidance law and the diverted profits tax rules. The ATO may therefore consider applying Part IVA in part to curtail a taxpayer's treaty rights in fact dependent circumstances.  The decision in this case, may result in the ATO further considering whether Part IVA should be applied in royalty withholding tax cases.

Key takeaways

This decision has significant implications for multinational entities under review by the ATO and may better inform a taxpayer's strategy when engaging with the ATO moving forward, particularly for those who operate in jurisdictions where a double-taxation treaty is involved and where transfer pricing or withholding tax is in issue.  Justice Perram highlighted a key consideration in the Commissioner's favour was the large number of taxpayers with royalty withholding tax audits and disputes and taxpayers with cross-border software distribution arrangements.  However, in light of the PepsiCo HCA decision in favour of the taxpayer, there is now some judicial guidance on what does not constitute an embedded royalty.  That guidance is no higher than the reality that each case will continue to turn on a taxpayers' individual facts and circumstances.

It remains to be seen how this decision will impact ATO compliance activity for taxpayers involved in the MAP process.  However, it highlights that there are important strategic decisions which may be made by taxpayers during the audit and review phase to maximise their resolution options, including preserving both MAP and domestic appeal rights. 

The Full Court observed that the question of whether certain payments of royalites is a fact-dependent exercise involving a close analysis of the terms of the contracts between the parties and the nature of their arrangements. This echoes the comments made by the High Court in PepsiCo. It is likely that the decision will also have implications for the Commissioner's position expressed in Draft Taxation Ruling TR 2024/D1 Income tax: royalties – character of payments in respect of software and intellectual property rights.  It may therefore be difficult for the Commissioner to continue to express such definitive positions that are also inconsistent with countries with whom Australia has DTA's.  If the Commissioner maintains this approach, it will invariably result in more taxpayers looking for relief through MAP.

The Full Court has yet to make final orders.  Once final orders are made, the Commissioner will have 28 days to file an application for special leave to appeal the Full Court's decision to the High Court of Australia.  Whilst not impossible, a grant of special leave to appeal an interlocutory matter is rare.

Any multinational taxpayer under an audit or objection related to the tax treatment of cross-border transactions, withholding tax or transfer pricing should consider their ATO engagement strategy.  In light of the Full Court's decision, taxpayers who are under audit or objection should be aware of their MAP rights and, if they choose to, initiate the MAP process at the earliest opportunity allowed by the relevant double-taxation agreement.

The consideration of MAP also depends on the countries involved, the arbitration rights involved, the strength of the taxpayer's case and the risk of anti-avoidance provisions being applied by the ATO.  Upon initiating MAP, taxpayers should also engage with the ATO to request a stay of any objection determination to allow MAP to play out.

Should the ATO refuse and progress the objection determination notwithstanding an active MAP process, taxpayers can seek to preserve their domestic appeal rights by applying for a stay of any Part IVC proceedings that they may be forced to commence.

Taxpayers should also consider whether their arrangements give rise to any issues under Part IVA.  The Full Court's decision may cause the ATO to give greater focus to Part IVA, as this may exclude any assessment from MAP.