Issue
Is a payment from the taxpayer to a Korean company X, for the surrender of data licensing rights, a 'royalty' under Article 12(3)(c) of Schedule 22 to the International Tax Agreements Act 1953 (Agreements Act)?
Decision
No. A payment from the taxpayer to company X for the surrender of data licensing rights is not a royalty under Article 12(3)(c) of Schedule 22 to the Agreements Act.
Facts
The taxpayer is an Australian resident company.
Company X and Y are residents of Korea for taxation purposes.
Y is the owner of the data licensing rights.
Company X and Y entered into a rights agreement under which company X was granted the data licensing rights.
Later, company X entered into a surrender agreement with the taxpayer under which company X agreed to surrender the data licensing rights for the payment of a fixed sum by the taxpayer to company X.
The taxpayer also entered into a license agreement with Y to acquire the data licensing rights. Y did not receive any payment from the taxpayer or from company X for entering into that agreement.
The data licensing rights acquired by the taxpayer from Y under the license agreement relate to the exclusive right to distribute any form of electronic catalogue containing information on the products to dealers worldwide.
Company X, Y and the taxpayer are unrelated and were dealing with each other on arms length terms.
Reasons for Decision
Schedule 22 to the Agreements Act contains the tax treaty between Australia and the Republic of Korea (the Korean Convention). The Korean Convention operates to avoid the double taxation of income received by Australian and Korean residents.
Article 12 of the Korean Convention deals with the taxation of royalties. Article 12(3)(c) of the Korean Convention provides that the term 'royalties' in this Article means payments or credits, whether periodical or not, and however described or computed, to the extent to which they are made as consideration for the supply of scientific, technical, industrial or commercial knowledge or information.
It is considered that the payment to company X is not a payment 'made as consideration for the supply of scientific, technical, industrial or commercial knowledge or information' for the purposes of Article 12(3)(c) of the definition of 'royalties' because it was made to induce company X to surrender the data licensing rights which company X had obtained from Y.
Although the payment to company X and the surrender of the data licensing rights by company X made it possible for the taxpayer to acquire the data licensing rights from Y, the payment itself is not a royalty as it was not made to the owner of the data licensing rights to acquire those rights but was paid to a third party as compensation for the surrender of the rights company X had obtained from Y.
It is considered that there is a presumption in the definition of 'royalties' in Article 12(3)(c) of the Korean Convention that a payment made as consideration 'for the supply of .... commercial knowledge or information' must be made to the owner of the commercial knowledge or information to constitute a royalty.
Y did not receive any part of the payment made by the taxpayer to company X for the surrender of the data licensing rights. Furthermore, the consideration was not paid to another person or otherwise applied or dealt with at the direction of Y. The entire payment remained with company X and no part of the payment passed to the owner of the data licensing rights, Y.
Accordingly, the payment made by the taxpayer to company X does not fall within the definition of royalties under Article 12(3)(c) of the Korean Convention.