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Ruling

Subject: Permanent establishment; Royalty withholding tax

Question 1:

Is income derived by the Company, an entity which is resident in Country X, from Australian customers for software access, professional services and support, assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Answer:

No.

Question 2:

Are payments for software access, professional services and support which are made by Australian customers to the Company, an entity which is resident in Country X, subject to royalty withholding tax under section 128B of the Income Tax Assessment Act 1936 ('ITAA 1936')?

Answer:

No.

This ruling applies for the following periods:

Income years ended 30 June 2008

Income years ended 30 June 2009

Income years ended 30 June 2010

Income years ended 30 June 2011

Income years ended 30 June 2012

Income years ending 30 June 2013

Income years ending 30 June 2014

The scheme commences on:

The Scheme has commenced.

Relevant facts and circumstances

The Company is incorporated in Country X and is a resident of Country X for income tax purposes.

The Company enters into an Agreement with Australian customers for the supply of computer software and relating services ('Service').

The Company charges its customers for the right to access and use a non-exclusive, non-transferable current business application. The term of the Agreement between the parties is normally for a specified period.

The Company's hosted software is installed and maintained on servers located in Country X. The Company's customers access the hosted software via the Internet and all computer processing for the functioning of the services occurs on the Company's servers in Country X.

The Agreement for the provision of the Service to Australian customers by the Company is executed by the Company in Country X. All contract terms and conditions are set in Country X.

The Agreement prohibits a customer from sublicensing the use of the Service to any third parties and the rights granted to the customers are provided on the condition that the customer does not copy and/or modify the Company's Service. The customer is never provided with, nor is ever in possession of a copy of, the software for this Service.

Under the Agreement, no tangible personal property, such as code, software or manuals is ever delivered to, or otherwise provided to, the customer. No space is consumed on the customer's hard drive as no software is transferred to the customer in connection with the Service.

The Company's software configuration services ('Professional Services') are performed by personnel located in Country X and a number of other countries including Australia. The Professional Services consist of personnel assisting customers with business process mapping, configuring forms and currently available features, training customer personnel and uploading data to the Company's server in Country X.

The fees for the Professional Services are separately stated on the sales invoice from the sale of the hosted software access fees.

Personnel providing the Professional Services in Australia are employed by the Company's Australian subsidiary, ('Australian subsidiary'). The Australian subsidiary charges a management fee to the Company for the provision of these and other services in Australia.

No employees of the Australian subsidiary have any right to negotiate the terms of the Agreement or to execute or conclude the Agreement with Australian customers of the Company. All contracts documents are signed in Country X by employees of the Company.

The Company's personnel may visit a customer's site in connection with large projects however this is an infrequent occurrence.

There has been only one site visit to Australia by the Company personnel in Country X in a specified period. On that visit, the sole Company employee was present in Australia for a short period to perform a very large implementation project and to train new staff in the Australian subsidiary. During that trip the employee spent approximately more than half of their time at the customer's site in Australia and the remainder at the Company Australia's subsidiary office.

The employee had no authority to negotiate and conclude contracts on behalf of the Company while in Australia and no employee of the Company visiting Australia has such authority.

The Company anticipates that sending employees to perform services in Australia in future will be on a rare occasion.

Nature of the Agreement

The Agreement provides that the Service provided is only available to customers solely for the customer's and its affiliates' users for business operations.

The Agreement prohibits the customer undertaking the following activities, which includes amongst other things:

· service bureau use, outsourcing, renting, reselling, sublicensing, concurrent use of a single user login, or time-sharing of the service.

· copy, translate, create a derivative work of, disassemble, or decompiles the Service

· attempt to discover any source code or modify the service in any manner or form unless expressly allowed in the user guide.

All rights, title and interest in and to all intellectual property rights in the Service are owned exclusively by the Company or its licensors. The licence granted to a customer does not convey any rights in the Service, express or implied, or ownership in the Service or any intellectual property rights.

With regards to the Professional Services, all rights, title and interest in and to these services which include work products and training material (excluding any customer property), and related intellectual property rights are retained by the Company. The Company provides customers with a limited, non-exclusive, non-transferable and terminable license to use the Professional Services solely for the customer's business operations.

The Agreement does not confer the rights to assign or transfer any intellectual property in the proprietary tools, libraries, know-how, techniques and expertise used by the Company.

Under the terms of the Agreement, the Company is an independent contractor. No agency, partnership or joint venture is created by the Agreement. There is no authority amongst other things to create any obligation, enter into any agreement, or make any representation on behalf of the other.

Relevant legislative provisions

Income Tax Assessment Act 1997

subsection 6-5(3)

Income Tax Assessment Act 1936

subsection 6(1)

section 128B

subsection 128B(2B)

International Tax Agreements Act 1953

section 3AAA

section 3AAB

subsection 4(1)

subsection 4(2)

Reasons for decision

Question 1:

Summary

Income derived by the Company, an entity which is resident in Country X, from Australian customers for software access, professional services and support, is not assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 ('ITAA 1997').

Detailed reasoning

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non-resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources.

The income derived by the taxpayer from the sale of the Company's products to Australian consumers is ordinary income.

In determining liability to Australian tax on Australian sourced income received by a non-resident, it is necessary to consider not only the income tax laws but also the applicable agreement as defined in section 3AAA or section 3AAB of the International Tax Agreements Act 1953 ('Agreements Act').

Subsection 4(1) of the Agreements Act incorporates the Income Tax Assessment Act 1936 ('ITAA 1936') and the ITAA 1997 so that those Acts are read as one with the Agreements Act.

Subsection 4(2) of the Agreements Act, provides that the Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Taxation Ruling TR 2001/13 at paragraphs 101 to 105 explains the Commissioner's view that the Commentaries on the Organisation for Economic Co-operation and Development ('OECD') Model Tax Convention on Income and on Capital are relevant to interpreting Australia's tax treaties ('OECD Commentary'). Accordingly, the Commentary on the OECD Model Tax Convention is relied upon and is cited below.

Article A of the tax treaty between Australia and Country X ('Country X Agreement') governs the taxation of business profits derived from Australia by a resident of Country X. Under Article A, the business profits of an enterprise of Country X shall be taxable only in Country X unless the enterprise carries on business in Australia through a permanent establishment situated in Australia.

The term 'permanent establishment' is defined in Article B of the Country X Agreement as a fixed place of business through which the business of an enterprise is wholly or partly carried on.

Paragraph 2 of the OECD Commentary on Article 5 of the OECD Model Tax Convention explains that the definition of permanent establishment contains the following requirements:

· the existence of a "place of business", i.e. a facility such as premises or, in certain instances, machinery or equipment;

· this place of business must be "fixed", i.e. it must be established at a distinct place with a certain degree of permanence;

· the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the state in which the fixed place is situated.

Article B of the Country X Agreement contains a list of examples, each of which can be regarded as constituting a permanent establishment, such as a place of management, an office, a branch, a factory or a workshop, etc.

Article B of the Country X Agreement identifies circumstances where a permanent establishment will be deemed to exist. It provides that an enterprise of Country X will be deemed to have a permanent establishment in Australia if the enterprise carries on business in Australia through a person (other than an independent agent) who has authority to conclude contracts on behalf of the enterprise and habitually exercises that authority in Australia.

Computer equipment and software are discussed in paragraph 42.2 of the OECD Commentary on Article 5. It states:

'Whilst a location where automated equipment is operated by an enterprise may constitute a permanent establishment in the country where it is situated (see below), a distinction needs to be made between computer equipment, which may be set up at a location so as to constitute a permanent establishment under certain circumstances, and the data and software which is used by, or stored on, that equipment. For instance, an Internet web site, which is a combination of software and electronic data, does not in itself constitute tangible property. It therefore does not have a location that can constitute a "place of business" as there is no "facility such as premises or, in certain instances, machinery or equipment" (see paragraph 2 above) as far as the software and data constituting that web site is concerned. On the other hand, the server on which the web site is stored and through which it is accessible is a piece of equipment having a physical location and such location may thus constitute a "fixed place of business" of the enterprise that operates that server.'

Based on the facts, the Company does not have a place of business in Australia such as premises or equipment in Australia.

The software is installed and maintained on servers located in Country X.

The Professional Services provided in Australia generally are performed by personnel of the Company's Australian subsidiary. However, the Company personnel may on a rare occasion visit a customer's site to provide the Professional services in connection with large projects.

In the specified period there has been one visit by an employee of the Company to a customer in Australia.

At paragraph 4 of the OECD Commentary on Article 5 it is stated that 'a place of business may also exist where no premises are available', however there still exists the requirement that the enterprise 'has a certain amount of space at its disposal'.

With respect to the Company employee who was present in Australia for the specified period, although the employee did use the space of the Australian customer and the Australian subsidiary to perform the Professional Services, paragraph 4.2 on Article 5 of the OECD Commentary states, 'the mere presence of an enterprise at a particular location does not necessarily mean that the location is at the disposal of that enterprise'. Furthermore, the example in that paragraph is pertinent to the current facts which states that:

· … a salesman who regularly visits a major customer to take orders and meets the purchasing director in his office to do so. In that case, the customer's premises are not at the disposal of the enterprise for which the salesman is working and therefore do not constitute a place of business through which the business of that enterprise is carried on ….'

Accordingly, the employee's use of the premises of the Australian customer and the subsidiary company to perform the Professional Services does not result in the premises of the Australian customer or the subsidiary company being a permanent establishment of the Company. Further, the temporary nature of the employee's stay in Australia would indicate that there is no permanent establishment.

Further, the employee had no authority to negotiate and conclude contracts on behalf of the Company while in Australia and no employee visiting Australia has such authority. Therefore, the employee would not be deemed to be a permanent establishment as a dependent agent under Article B of the Country X Agreement.

With regards to the Australian subsidiary, although the Company's activities in Australia are carried on by the subsidiary company, which receives a fee for the provision of those services, paragraph 40 of the OECD Commentary on Article 5 of the OECD Model Tax Convention explains that it is generally accepted that the existence of a subsidiary company does not of itself, constitute that subsidiary company to be a permanent establishment of its parent company.

However, paragraph 41 of the OECD Commentary on Article 5 provides that a parent will be deemed to have a permanent establishment in a State in respect of any activities that its subsidiary undertakes for it if the subsidiary has, and habitually exercises, in that State an authority to conclude contracts in the name of the parent, unless these activities are limited to those referred to in paragraph 4 of the Article (such as preparatory or auxiliary activities), or unless the subsidiary acts in the ordinary course of its business as an independent agent to which paragraph 6 of the Article applies.

In this instance, Article B of the Country X Agreement will not apply as the Australian subsidiary has no authority to conclude contracts on behalf of the Company.

In conclusion, the Company is not carrying on a business through a permanent establishment in Australia as defined in Article B of the Country X Agreement. Accordingly, Australia will not have a taxing right to any income under Article A of the Country X Agreement.

Consequently, the income derived by the Company from Australian customers for software access, professional services and support, is not assessable under subsection 6-5(3) of the ITAA 1997.

Question 2:

Summary

Payments for software access, professional services and support which are made by Australian customers to the Company, an entity which is resident in Country X, are not subject to royalty withholding tax under section 128B of the Income Tax Assessment Act 1936 ('ITAA 1936').

Detailed reasoning

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 to a non-resident, except where they are outgoings wholly incurred by the resident in carrying on a business outside Australia at or through a permanent establishment of the resident outside Australia.

To determine whether withholding taxes should be imposed on the software licence fees, professional services and support payments derived by a non-resident company, it is necessary to consider whether the income constitutes royalties for the purposes of the Australian tax laws and the Country X Agreement.

The term 'royalty' is defined in subsection 6(1) of the ITAA 1936 which is as follows:-

'royalty' or 'royalties' includes any amount paid or credited, however described or computed, and whether the payment or credit is periodical or not, to the extent to which it is paid or credited, as the case may be, as consideration for:

(a) the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or right;

(b) the use of, or the right to use, industrial, commercial or scientific equipment;

(c) the supply of scientific, technical, industrial or commercial knowledge or information;

(d) the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c);….'

Taxation Ruling TR 93/12 'Income tax: computer software', at paragraph 3, states that the nature of amounts received in respect of computer software depends on the terms of the particular agreement between the parties, having regard to all the circumstances of the case.

Software licence fees

In TR 93/12 at paragraph 3, it is stated that a payment is considered to be a royalty for the purposes of the ITAA 1936 where the payment is:

'(a) consideration for the granting of a license to reproduce or modify the computer program in a manner that would, without such licence, constitute an infringement of copyright (paragraph (a) of the definition of royalty). Examples include payments for the right to manufacture copies of a program from a master-copy for distribution, and payments for the right to modify or adapt a program.

(b) consideration for the supply of know-how (paragraph (c) of the definition of royalty). Payments for the supply of the source code or algorithms of a program are, prima facie, considered to come within this paragraph.'

Paragraph 4 of Taxation Ruling TR 93/12 sets out the type of payments that are generally not royalties for income tax purposes:

'(a) payments for the transfer of all rights relating to copyright in the program;

(b) payments for the granting of a licence which allows only simple use of the software, i.e. allows the end-user to run the software on a single computer or a computer network but does not otherwise permit any use of the copyright in the program;

(c) proceeds from a sale of goods. Receipts for software are proceeds of a sale of goods where:

(i) hardware and software are sold in an integrated form without being priced separately, i.e. without being unbundled; or

(ii)  property in tangible goods, such as a disk, diskette or magnetic tape on which software is embodied, is transferred to the consumer; and

(d) payments for the provision of services in the modification or creation of software.'

Paragraphs 18, 19 and 20 of TR93/12 discuss 'Licence to use copyright', it states:

'18. Under the Copyright Act, a number of rights, including rights to reproduce (other than the making of a back-up copy), modify or adapt a computer program, are exclusive rights of the copyright owner. The copyright owner may, however, authorise another person to do what would otherwise be an infringement of copyright.

19. Payments for the right to do acts comprised in the copyright are considered to come within paragraph (a) of the definition of 'royalty', being amounts paid as consideration for the use of, or the right to use, copyright in the computer program. The term 'copyright' is not defined in the Act and, for purposes of the definition of 'royalty' in subsection 6(1) of the Act, is taken to have the same meaning as it has under the Copyright Act. Thus acts comprised in the copyright means those acts which are referred to in paragraph 31(1)(a) of the Copyright Act.

20. In determining whether or not a payment is for the use of copyright, it is important to distinguish between a payment for the right to use the copyright in a program and the right to use the program itself. A payment for the right to use the program itself only allows the licensee to operate or run the program on a computer. On the other hand, a payment for the right to use the copyright in a program allows the licensee to modify, adapt or copy, or otherwise do what would ordinarily be the exclusive right of the copyright owner. Thus a payment by a distributor for the right to make copies of a program from a master-copy, whether the payment is a one-time or periodical payment or a fee calculated by reference to the number of times the program is reproduced, is a royalty. So too is a payment to the copyright owner by a software house or a computer programmer for the right to modify or adapt a program to meet the individual needs of a computer user. Payments received as damages for infringement of copyright in a computer program are also considered to be amounts received by way of consideration for the use of copyright and are therefore royalties under this paragraph. However, payments solely for the right to import and/or distribute software, without any licence to use the copyright, are not royalties. Such payments are not for the right to do any act comprised in the copyright, notwithstanding that the importation without the copyright owner's permission would constitute an infringement of copyright.'

With respect to 'Licence to use the software', paragraphs 26 to 29 of Taxation Ruling TR 93/12 state:

'26. A copy of a software program, embodied on disk, diskette, magnetic tape or other carrying media, is frequently acquired under a licensing arrangement, the most common of which is known as a 'shrink-wrap' licence. Under these arrangements the end-user is granted a licence to use the software, i.e. to run the program and to make a back-up copy of the program…..A licence is granted to use the software either on a single computer, or on a specified number of the licensee's computers or network servers. The licence may also specify that the software may only be used on the licensee's computers at certain locations (Site Licence) or may limit the number of simultaneous users. The licence also purports to limit the end-user's powers to deal with the software, e.g. it cannot be transferred or hired without the permission of the licensor. Under such licence agreements, neither copyright in the program nor property in the tangible carrying media is transferred to the end-user; the software and all copies made of it remain the property of the software manufacturer or developer.

27. Payments for any licence for simple use of computer software (i.e. where the end-user acquires only the right to run the program, whether on a single computer only or on the licensee's computer network, and does not acquire any rights to use the copyright in the program) are not royalties for purposes of income tax law. It is arguable that some part of the amount paid for the acquisition of computer software under a licensing arrangement is attributable to an express or implied licence to use the copyright in the program. For example, it may be that the act of loading a program onto the hard disk of a computer would, without permission from the copyright owner, be an infringement of copyright (see Sheppard J in Dyason and Ors v. Autodesk Inc and Anor (1990) 96 ALR 57 at p. 88). Although the amount attributable to such express or implied licence would strictly be a royalty, being an amount paid 'for the use of, or the right to use, any copyright' (paragraph (a) of the definition), it is accepted that the amount, if quantifiable, is likely to be minimal. For this reason, it has been decided that no apportionment of the licence fee paid in respect of the software is necessary to take account of this amount.

28. It is also accepted that, in the case of packaged software, payments for the acquisition of software under a licencing arrangement does not ordinarily involve the supply of technical knowledge or information for purposes of paragraph (c) of the definition of royalties. Where the purchaser or licensee obtains nothing more than a set of coded computer instructions, without the underlying source code, it cannot be said that knowledge or information about the program in the relevant sense of know-how has been transferred.

29. Payments for a licence for simple use only of computer software are not royalties, irrespective of whether the software is acquired by a distributor for sub-licencing to end-users (e.g. where packaged software is acquired by the distributor under licence and is sub-licenced to the end-user) or by end-users directly.'

Article C of the Country X Agreement governs the taxation of royalties derived by a resident of Country X from sources in Australia. Under Article C of the Country X Agreement, royalties from sources in Australia, being royalties to which a resident of Country X is beneficially entitled, may be taxed in Australia.

Article C of the Country X Agreement states that the term "royalties" means:

'(1) payments or credits of any kind to the extent to which they are consideration for the use of or the right to use any:

· copyright, patent, design or model, plan, secret formula or process, trademark or other like property or right;

· motion picture films; or

· films or audio or video tapes or disks, or any other means of image or sound reproduction or transmission for use in connection with television, radio or other broadcasting;

(2) payments or credits of any kind to the extent to which they are consideration for:

· the supply of scientific, technical, industrial or commercial knowledge or information owned by any person;

· the supply of any assistance of an ancillary and subsidiary nature furnished as a means of enabling the application or enjoyment of knowledge or information referred to in sub-paragraph (b)(i) or of any other property or right to which this Article applies; or

· a total or partial forbearance in respect of the use or supply of any property or right described in this paragraph; or

· income derived from the sale, exchange or other disposition of any property or right described in this paragraph to the extent to which the amounts realized on such sale, exchange or other disposition are contingent on the productivity, use or further disposition of such property or right.'

The definition of 'royalties' in paragraphs (1)(a), (2)(a) and (2)(b) of Article C in the Country X Agreement are similar to the extended meaning of the term 'royalties' in subsection 6(1) of the ITAA 1936. Therefore, the views expressed in Taxation Ruling TR 93/12 in relation to the domestic law definition will apply equally to the definition in the Country X Agreement.

Accordingly, there is no discrepancy between the definition of "royalties" in both the Country X Agreement and in Australia's domestic income tax law.

The Country X Agreement is based on the OECD Model. Paragraph 13.1 of Article 12 of the OECD Commentary states that where consideration is for the granting of rights to use the program in a manner that would, without the license, constitute an infringement of copyright, then under such arrangements, the payments would be for the right to use the copyright in the program. Examples include licenses to: 'reproduce and distribute to the public software incorporating the copyrighted program, or to modify and publicly display the program'.

Paragraphs 14 and 14.2 of the OECD Commentary on Article 12 describe the transactions where the payments would not constitute royalties:

'14. In other types of transactions, the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the program, for example, where the transferee is granted limited rights to reproduce the program ... Regardless of whether this right is granted under law or under a license agreement with the copyright holder, copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilising the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analysing the character of the transaction or tax purposes…..'

'14.2 The ease of reproducing computer programs has resulted in distribution arrangements in which the transferee obtains rights to make multiple copies of the program for operation only within its own business. Such arrangements are commonly referred to as 'site licences', 'enterprise licences' or 'network licences'. Although these arrangements permit the making of multiple copies of the program, such rights are generally limited to those necessary for the purpose of enabling the operation of the program on the licensee's computers or network, and reproduction for any other purpose is not permitted under the license.....'

The OECD Commentary above follows closely the ATO's views expressed in Taxation Ruling TR 93/12.

Generally, payments by the end-user, or by the distributor, for the simple use of software are not royalties even if the end-user also obtains the right to download the software on the end-user's own computer network or to make a back-up copy. However, payments for the right to make copies from a master-copy or payments for the right to modify the software or payments to obtain the source code are royalties.

As noted in paragraph 3(a) of TR 93/12, a payment is considered to be a royalty for Australian income tax purposes if the consideration for granting of a licence to reproduce or modify the computer program in a manner that would, without such licence, constitute an infringement of copyright.

In the present case, the Agreement is entered into between the Company, a non-resident, and Australian customers for the supply of software and related support services.

The Company's customers access the hosted software via the Internet and all computer processing for the functioning of the services occurs on the Company's servers in Country X.

The Agreement provides that the Services provided are only available to customers solely for the customer's and its affiliates' users for internal business operations.

The Agreement prohibits a customer from sublicensing the use of the Service to any third parties and the rights granted to the customers are provided on the condition that the Customer does not copy and/or modify the Company's Service. Further, the customer is not given the access to the source code of the programme under the terms of the Agreement.

The Agreement provides that all rights, title and interest in and to all intellectual property rights in the Service are owned exclusively by the Company or its licensors. Except as provided in the Agreement, the licence granted to the Customer does not convey any rights in the Service, express or implied, or ownership in the Service or any intellectual property rights.

With regards to the Professional Services, all rights, title and interest in and to these services which include work products and training material (excluding any customer property), and related intellectual property rights are retained by the Company. The Company provides customers with a limited, non-exclusive, non-transferable and terminable license to use the Professional Services solely for the customer's business operations.

The Agreement does not assign or transfer any intellectual property in the proprietary tools, libraries, know-how, techniques and expertise used by the Company to the customer.

Based on the facts provided and the various clauses in the Agreement, the payments made by Australian customers to the Company would not be a royalty payment as defined under subsection 6(1) of the ITAA 1936 or Article C of the Country X Agreement. Title to the software is retained by the Company. The Customer has no rights to reproduce or modify the software under the Agreement. The Customer receives no rights of ownership of intellectual property under the agreement. Therefore, the payment is considered to be for the right to use the program itself and would not constitute a royalty in light of Taxation Ruling TR 93/12.

Finally, in consideration of paragraph 3(b) of Taxation Ruling TR 93/12, there is no supply of know-how by the Company to customers. The Company has not provided the customers with source code or algorithms for the Company System software. These payments would not satisfy the definition of 'royalty' under subsection 6(1) of the ITAA 1936 or Article C of the Country X Agreement.

Accordingly, the payments made by Australian customers to the Company under the Agreement would not be a royalty payment as defined under subsection 6(1) of the ITAA 1936 or Article C of the Country X Agreement.

Payments for professional services and support

Paragraph (d) of the definition of royalty or royalties in subsection 6(1) of the ITAA 1936 includes payments for the supply of assistance which is ancillary and subsidiary to, and furnished as a means of enabling the application or enjoyment of any property or right covered by paragraphs (a) of the definition; any equipment covered by paragraph (b) of the definition; or any knowledge or information covered by paragraph (c) of the definition.

Paragraph 44 of Taxation Ruling TR 93/12 states that payments for assistance relating to software are royalties within the meaning of the definition in subsection 6(1) of the ITAA 1936 where the assistance is subsidiary and ancillary to the right to use copyright or the supply of know-how. Paragraph 45 goes on to say that in the case of contracts for the acquisition of packaged software, where there will generally be no transfer of know-how or a right to use copyright, any assistance provided by the software house or distributor will not come within the definition in subsection 6(1) of the ITAA 1936.

In this instance, provision of professional services and support include activities such as assisting customers with business process mapping, configuring forms and currently available features, training customer personnel and uploading data.

As it has been decided above that the payments for the provision of software access under the Agreement would not be regarded as a royalty, the fees derived by the Company for the provision of professional services and support are not considered royalties as defined in subsection 6(1) of the ITAA 1936. These services are considered to be neither subsidiary nor ancillary to the right to use copyright or the supply of know-how.

In conclusion, the payments derived by the Company for the provision of software access and professional services and support to Australian customers under the Agreement are not subject to royalty withholding tax under section 128B of the ITAA 1936.