ATO ID 2006/305: Withholding tax obligation: royalty paid to an Australian agent of a non-resident licensor
Date of decision: 31 October 2006
Year of income: Year ended 30 June 2006
Business line: Private Groups and High Wealth Individuals

Issue
Is an Australian entity acting as agent for a non-resident licensor required, under section 12-285 of Schedule 1 to the Taxation Administration Act 1953 (TAA), to withhold tax from royalty payments it receives in Australia on behalf of the non-resident licensor?

Decision
Yes. The Australian entity acting as agent for a non-resident licensor is required, under section 12-285 of Schedule 1 to the TAA, to withhold tax from royalty payments it receives in Australia on behalf of the non-resident licensor.

Facts
Under an intellectual property agreement, a non-resident licensor grants a licence to a licensee resident in Australia. Under the agreement the non-resident licensor nominates an Australian resident entity as agent to perform various commercial and managerial responsibilities on the non-resident licensor's behalf in Australia. Pursuant to the agreement the licensee, in carrying on its business in Australia, makes royalty payments to the Australian resident entity which receives the payments in Australia as agent for the non-resident licensor. The payments are royalties for purposes of the Income Tax Assessment Act 1936 (ITAA 1936) and the relevant double tax agreement allows tax to be withheld in Australia.

Reasons for decision
Summary: Under subsection 128B(2B) of the ITAA 1936 royalties derived by a non-resident are subject to withholding tax unless an exemption applies. Withholding tax applies where the royalties are paid by a resident, except where they are outgoings wholly incurred by the payer in carrying on a business outside Australia at or through a permanent establishment of the resident outside Australia. Section 12-280 of Schedule 1 to the TAA provides that 'payers' of royalties are required to withhold tax if: Subsection 12-285(1) of Schedule 1 to the TAA provides that that an entity that 'receives' a payment of a royalty must withhold an amount from the payment if the entity is a person in Australia or an Australian government agency; and the foreign resident is or becomes entitled: Section 12-280 of Schedule 1 to the TAA and section 12-285 of Schedule 1 to the TAA are designed to apply to different situations. It is not intended that both the payer and the entity that receives the payment must withhold. Therefore, the question at issue is whether the licensee (the payer of the royalty) or the Australian resident agent (the recipient of the payment) is required to withhold. The Australian resident agent is an entity in Australia that receives the royalty payments. It follows that section 12-285 of Schedule 1 to the TAA is the relevant provision. Therefore, it is the Australian resident agent that is required to withhold tax from the royalty payments it receives on behalf of the non-resident licensor. Section 12-280 of Schedule 1 to the TAA is intended to apply where the entity actually receiving the royalty payment is outside Australia or has an address outside Australia. Under the facts here, the entity actually receiving the payment is an entity in Australia - the Australian resident acting as agent in Australia for the non-resident licensor. It follows that the licensee (the payer) is not required to withhold under section 12-280 of Schedule 1 to the TAA.

Legislative references: Income Tax Assessment Act 1936 subsection 128B(2B)
Other references: Fact Sheet - PAYG withholding from interest, dividends and royalties to non-residents
Subject references: Non-resident entities Non-resident royalty withholding tax PAYG system PAYG withholding PAYG withholding under dividend, interest & royalty payment category