Issue
Are payments made for the exclusive right to use a broadcasting licence and an apparatus licence 'royalties' under Article 12 of Schedule 1 of the International Tax Agreements Act 1953 (the UK Convention)?
Decision
No. Payments for the exclusive right to use a broadcasting licence and an apparatus licence are not royalties under Article 12 of the UK Convention.
Facts
An owner of a Broadcasting Licence and an Apparatus Licence (the Licensor Entity) entered into an agreement with another entity (the Licensee) for the exclusive right to use the two licenses for a certain period of time.
The Licensee is required to pay an annual fee to the Licensor Entity for the use of both of the licenses. The fee is calculated as a percentage of the gross earnings of the Licensee for the 12 month period.
The Broadcasting Licence is issued under sections 36 and 38 of the Broadcasting Services Act 1992.
The Apparatus Licence is issued under section 102 of Part 3.3 of the Radiocommunications Act 1992.
Reasons for Decision
The UK Convention operates to avoid the double taxation of income received by Australian and United Kingdom residents.
Article 12(3) of the UK Convention contains an exhaustive definition of the term 'royalties' for the purposes of Article 12. In particular, Article 12(3)(d)(ii) defines a royalty to mean: ...payments ... made as consideration for the use or right to use ...films or audio tapes or disks, or any other means of image or sound reproduction or transmission for use in connection with television, radio or other broadcasting.
This part of the definition extends the definition of royalties beyond that of the OECD Model Tax Convention definition of royalties in Article 12. The wording of this provision reflects an amalgamation of the wording used in the domestic law definition of royalties in paragraphs (db), (dc) and (e) in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). The Explanatory Memorandum to the UK Convention explains at paragraph 1.154 that the provision includes: Payments for the use of video or audio disks or any other means of image or sound reproduction or for transmission for use in connection with television, radio or other broadcasting (e.g. satellite and Internet broadcasting).
The provision, therefore, covers the more traditional as well as newer forms of technology used for image or sound reproduction or transmission. Like the relevant paragraphs of the domestic law definition of a royalty, this provision relates to payments for the use of sound 'content', such as songs or programs, used in radio broadcasting.
In respect of that part of the payment that relates to the Broadcasting Licence, the Licensee is paying for an exclusive right to use the Broadcasting Licence, and the underlying right conferred by that licence to use a specific band of radiofrequency spectrum. The payment does not relate to the right to use sound content. Therefore, the payment for the use of the Broadcasting Licence does not fall within the definition of royalties under Article 12(3)(d)(ii) of the UK Convention, and is not a royalty for the purposes of Article 12 of the UK Convention.
The part of the payment that relates to the use of the Apparatus Licence also does not fall within the definition of royalties under Article 12(3) of the UK Convention. The Licensee is paying for the exclusive right to use the Apparatus Licence, and the underlying right conferred by that licence for the authorisation to operate one or more specified radio communication devices.
This payment does not fall within any of the paragraphs of Article 12(3) of the UK Convention. Consideration of whether the payment could be an 'industrial, commercial or scientific equipment royalty' is not necessary as this type of royalty is not included in the definition of royalties in Article 12(3) of the UK Convention. The Explanatory Memorandum makes this clear at paragraph 1.155 when it explains that these types of royalties were removed from the definition under the new UK Convention.