When you are on a good thing, stick to it – never look a gift horse in the mouth and never change horses in mid-stream.

The Full Federal Court has affirmed the first instance decision that fees paid by Australian customers to an Indian company for the provision of certain ‘technical services’ constituted royalties. The appellate court also affirmed the trial judge’s conclusion that the royalties were not ‘effectively connected’ with the Indian company’s Australian permanent establishment. The payments were, therefore, subject to Australian royalty withholding tax rather than being taxed as business profits under the normal assessing provisions.

The decision is one of those curios that appear from time to time. It is another international case which further develops Australia’s international tax law, which is to be welcomed as the world’s international tax framework stands on the cusp of fundamental reform. On the other hand, certain features of the case – an ‘old’ double tax agreement provision; an optimistic taxpayer forced to reverse position; the ATO similarly reversing its position; and provisions inserted into the treaty for the benefit of India, which appear to have been applied against the Indian company - raise questions about how wide will be the impact of the decision in practice. 

At the very least, every off-shore company delivering services  into Australia via a permanent establishment, with support provided from off-shore, must ensure the Australian income should be returned through the Australian tax return, and that it should not be subject to royalty withholding tax.

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