Taxpayer cannot be forced to abandon Mutual Agreement Procedure to preserve domestic appeal rights 16 min read
On Tuesday 21 October 2025, the Full Federal Court in Oracle Corporation Australia Pty Ltd v Commissioner of Taxation [2025] FCAFC 145 (the Appeal Decision) allowed an appeal against the Federal Court's earlier decision1 (the First Instance Decision), which refused Oracle's application for a temporary stay of proceedings. In those proceedings, Oracle sought to challenge penalty assessments relating to royalty withholding tax that the Commissioner considered applied to payments made under software distribution arrangements.
The successful appeal allowed a stay of Oracle's domestic proceedings until conclusion of the Mutual Agreement Procedure (MAP) under the double taxation treaty between Australia and the Republic of Ireland (DTA), including any arbitration.
The DTA in this case was a 'covered tax agreement' for the purposes of the Multilateral Instrument to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The MLI altered the operation of the MAP procedure in the DTA and supplemented it with a mandatory binding arbitration clause.
In this Insight, we outline the key points from the judgment and what they mean for your approach to double taxation relief.
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Key takeaways
The Appeal Decision is significant for multinational groups seeking relief under double taxation agreements, particularly where statutory time limits coupled with the timing of the Commissioner's objection decisions require taxpayers to initiate domestic proceedings to preserve their rights of appeal and review. Taxpayers who take such steps might be forced to elect between a MAP and their domestic proceedings—unless a stay is granted. The decision is particularly significant in relation to those double taxation treaties where the MAP provisions contain a compulsory arbitration clause that the taxpayer wants to take advantage of, but which the Commissioner does not want deployed.2
The Commissioner's intended strategy: MAP or domestic appeal rights, not both
The Commissioner sought to force the taxpayers to choose between the suspension of the MAP (and the continuation of their domestic appeal rights) or the abandonment of their domestic appeal rights (and the continuation of the MAP), and thereby remove the optionality reserved to the taxpayer under the treaty system by compelling a binary choice. The Commissioner's strategy in seeking to do so involved the Commissioner:
- disallowing the objections, triggering the 60-day time limit for the taxpayer to initiate proceedings or lose their appeal rights.
- resisting the taxpayer's application for a stay of the proceedings.
- simultaneously suspending the MAP, pursuant to an article in the DTA enabling him to do so where there was a case 'pending' with respect to one or more of the same issues in a court or tribunal that had not been 'suspended or withdrawn'. If the case was not 'suspended' by virtue of a stay (which the Commissioner was resisting), the taxpayer would have to withdraw it to avoid MAP being suspended. This was notwithstanding that the OECD Commentary shows that, generally, a competent authority in the position of the ATO should seek to suspend (ie stay) the domestic proceedings.
- asserting that the public interest favoured the refusal of a stay, as it would enable the judicial determination of the royalties issue for the benefit of others. This was said to include approximately 15 other cases similarly involving the distribution of software and the consideration of the definition of royalty for Australian tax purposes. The Commissioner asserted this on the basis of a single paragraph in an affidavit with no detail about those other cases and how they involved similar legal issues. The Commissioner also sought to rely on a disagreement or dispute between Australia and the United States in reference to royalty withholding tax and software distribution agreements, for which there was similarly a limited evidentiary basis.3
- seeking to 'stop the clock' in relation to a two-year (or extended) pre-arbitration period by which, if the competent authorities had not reached agreement in the MAP, the taxpayer could submit the unresolved issues to a compulsory arbitration.4 Such an arbitration decision would be binding upon both of the competent authorities, but very importantly, not upon the taxpayer.5
The Commissioner's strategy failed
Importantly, the Appeal Decision:
- confirms that, generally, the choice of remedy should remain with the taxpayer when MAP is invoked and the taxpayer wishes to keep its domestic appeal rights alive.
- confirms that the general position under the DTA and the MLI, where a taxpayer wishes to invoke MAP in addition to keeping alive domestic appeal rights, is that domestic proceedings should be stayed to permit the MAP (including any arbitration) to proceed if that is what the taxpayer wishes.
- echoes statements made by the High Court earlier this year in Commissioner of Taxation v PepsiCo Inc6 (PepsiCo) that determining whether payments are royalties is a fact-dependent exercise involving close analysis of the terms of the contracts between the parties and the nature of their arrangements.
- emphasises the need for any public interest submissions made by the Commissioner in support of the refusal of a stay to be substantiated by evidence. Based on the slender evidentiary foundations in this case (and that the royalty issue in relation to Oracle would be very fact-dependent), it was not open to the primary judge to conclude that judicial determination of the Oracle proceedings would provide 'material' guidance in relation to the 15 other taxpayers (or the US-Australian 'dispute' in relation to the issue). Accordingly, the refusal of the stay was not warranted.
The court held that the practical effect of the Commissioner's approach in issuing the objection decisions and then opposing a stay so as to prevent the pursuit of both a MAP and domestic court proceedings (albeit not simultaneously) was to require the taxpayer to abandon one of the two options, and this was not what the DTA and the MLI contemplated. Going forward, it is likely to be more difficult for the Commissioner to seek enforce this choice upon taxpayers.
As MAP outcomes (and mandatory arbitration, if applicable to the relevant double taxation treaty) are not binding on the taxpayer,7 taxpayers should now be able to pursue MAP and, where applicable, compulsory arbitration, as well as court proceedings, sequentially by requesting a stay of domestic proceedings.
Where the MLI has been adopted so as to modify the relevant double taxation treaty, among other things, by providing the option for mandatory binding arbitration, taxpayers may find it increasingly useful to seek to avoid double taxation through the utilisation of mandatory binding arbitration.
Other barriers to MAP
The result in this case may cause the Commissioner to examine other means of limiting the use of mandatory arbitration under a double taxation treaty (see below).
Background
The dispute concerned payments made by the Australian subsidiary of the Oracle group (Oracle Australia) to its Irish affiliate (Oracle Ireland) in relation to a software distribution arrangement. The Commissioner asserted the arrangements involved payments comprising royalties as defined in the DTA, such that Oracle Ireland was required to pay royalty withholding tax.
Under the DTA (as modified by the MLI), taxpayers could request the Australian and Irish competent authorities to resolve the double taxation through a MAP. The DTA also provided for mandatory arbitration if MAP did not result in mutual agreement between the authorities within two years.
Despite initially proceeding on the basis (at the taxpayer's request) that MAP would be the primary resolution mechanism, the Commissioner subsequently disallowed Oracle's objections, triggering the 60-day period for Oracle to appeal against the Commissioner's decisions or lose its domestic appeal rights.
Oracle Australia commenced proceedings in the Federal Court appealing the Commissioner's disallowance of objections to penalty assessments (on the basis of failure to withhold amounts from royalty payments) and concurrently sought relief through an application for a stay of those proceedings pending resolution of the MAP.
The Commissioner resisted the stay application and argued the court should exercise its discretion to refuse the stay, broadly, on the basis that it would:
- provide guidance relevant to approximately 15 entities whose software distribution arrangements were in dispute with the ATO and required consideration of the definition of 'royalty'; and
- assist in resolving friction between Australia and the United States on the same issue.
At first instance, Justice Perram accepted the Commissioner's submissions and held that 'one case should proceed to final appellate determination for the guidance of all'.
The 'heart of the appeal' in the Full Federal Court was whether Justice Perram should have taken those public interest considerations into account. Justices Hespe, Button and Younan unanimously held that the First Instance Decision suffered from errors of fact, due to 'slender evidentiary foundations' and because the dispute was 'mired in the facts of [Oracle's] specific arrangements'.
In addressing the matters relevant to the exercise of the court's discretion to grant a temporary stay, at first instance Justice Perram considered a number of OECD documents in interpreting the DTA and MLI. His Honour concluded that the relevant factors included the following:
- judicial determination on the royalty question would bind the Commissioner and preclude a contradictory MAP outcome.8
- refusing a stay would force taxpayers to choose between a MAP and pursuing their domestic proceedings. This would be inconsistent with textual indications in the DTA and MLI, as well as the extrinsic materials from the OECD, which suggested that the taxpayers should be able to access both mechanisms, and access MAP in addition to any domestic procedures (albeit that they could not be pursued simultaneously).9
- the OECD commentary and extrinsic materials suggested that the usual position would be to suspend legal remedies pending the outcome of MAP and for the taxpayer to choose whether to proceed by a MAP or domestic litigation.10
- the effect of the Commissioner's disallowance of the objections was to require Oracle to abandon one of the two procedures, and nothing in the DTA, the MLI or extrinsic materials supported that a competent authority may seek to force a taxpayer to pursue domestic remedies by opposing the taxpayer's application to stay its own proceeding.11
In light of the above analysis, Justice Perram found that, generally speaking, if a taxpayer has been forced to commence domestic proceedings to meet a time limit, proceedings should be stayed to permit the MAP (including any arbitration) to proceed, if that is what the taxpayer wishes.
However, Justice Perram found that the public interest in the domestic proceedings progressing to a judicial determination and providing guidance to the 15 other taxpayers in dispute and the 'dispute' between Australia and the United States displaced this general position so that the stay should be refused.
The Full Federal Court agreed with Justice Perram's 'careful and comprehensive analysis' of the DTA and MLI, as well as his conclusions as regards the general position that arises under them where a taxpayer wishes to invoke a MAP in addition to keeping alive domestic appeal rights.
However, the Full Federal Court allowed the appeal based on two key factors: first, the fact that royalty disputes are intensely fact-specific; and second, that the Commissioner's public interest submissions in support of resisting a stay lacked the necessary evidentiary foundation to make the findings of fact on which Justice Perram relied in refusing the stay.
Royalty controversies are intensely fact-specific
The Full Court explained that Oracle's dispute turned on the specific facts of its arrangements, reiterating the commentary made by the High Court earlier this year in PepsiCo.
The Full Court stated:
In short, the tax controversy is mired in the facts of the specific arrangements between Oracle Australia and Oracle Ireland. That this is the case is to be expected. As the High Court’s recent decision in [PepsiCo] exposes, the question of whether payments under particular contractual arrangements are “consideration for” particular rights turns on the terms of the contracts between the parties […] Similarly, International Business Machines Corporation v Commissioner of Taxation [2011] FCA 335; (2011) 91 IPR 120 illustrates that determining whether or not certain payments are royalties is a fact-dependent exercise involving close analysis of the terms of the contracts between the parties, and the nature of their arrangements.
On the basis that determination of the royalty question required consideration of whether payments were 'made as consideration for…the use of, or right to use, any copyright' such that there was no question of law that could be answered that was divorced from the specific arrangement at issue, the Full Court stated that the 'dispute between Oracle and the Commissioner is anchored in the very particular circumstances of the contracts between Oracle Ireland and Oracle Australia'. Accordingly, there was no support for the proposition that a decision in relation to this matter would provide guidance in relation to other matters.
Paucity of evidence
Further, the Full Court was unreserved in pointing out the insufficiency of evidence to make the conclusion (as Justice Perram did) that final judicial determination of the Oracle proceedings would provide material guidance for the 15 other taxpayers or assist in resolving the dispute with the United States. In particular, the Full Court made the points that:
- the evidence regarding the other taxpayers whose disputes might benefit from the guidance provided by the determination of the Oracle proceedings 'went no higher and no further than the single sentence' included in the Assistant Commissioner's affidavit, which stated that '[t]he ATO is aware of approximately fifteen entities whose arrangements require consideration of the definition of a "royalty" […] in connection with software distribution and related arrangements';
- there was no evidence adduced:
- explaining the imprecision in the number of 'approximately' 15 taxpayers referred to in the affidavit;
- on the nature of the 15 taxpayers' arrangements and the rights granted therein;
- regarding what aspects of the definition of royalty were in dispute;
- suggesting that the tax affairs of the 15 other taxpayers involved the application of a double taxation agreement;
- the evidence regarding disagreements between the Australian Government and the United States on the Commissioner's approach to the definition of royalty under the DTA was 'very limited', comprising only of two letters; and
- notably:
- there was no evidence of any response to the US letters which may have been sent in reply; and
- there was no identified basis to suppose that the United States Treasury would necessarily accede to whatever view might be taken by the court in the proceedings.
Accordingly, there was 'simply no basis' upon which to conclude that there was a common principal issue to be resolved or that the determination of the proceedings would shed meaningful light on the other 15 taxpayers' arrangements.
Similarly, the Full Court found that the proposition that the decision of a domestic court of one national party to an international disagreement would resolve or materially assist in the resolution of that disagreement was speculative on the evidence.
For these reasons, the Full Federal Court considered that the primary judge made errors of fact in concluding the existence of a public interest supporting the refusal of the stay.
Both the fact-specific nature of the dispute and the insufficient evidence were critical to the Full Court's reasoning. However, the appellants' submissions that the two factors considered by Justice Perram were not matters of 'high' public interest and were irrelevant was not accepted. The Full Court accepted that a public interest could inhere in particular private litigation in different ways, citing the decision of the Full Federal Court in Epic Games Inc v Apple Inc.12
The Full Court was also critical of several aspects of the Commissioner's conduct and submissions in the proceedings.
First, the Full Court rejected the Commissioner's submissions which disclaimed his own role in prompting the domestic litigation. The Appeal Decision detailed the chronology of events leading up to the stay proceedings, including correspondence from the ATO clearly acknowledging that the taxpayers were treating MAP as the primary mechanism for resolution of the double taxation and the ATO's acquiescence (at the time) to the suspension of the objection process in the interim. The Full Court stated:
The ATO was, for a significant period of time, proceeding on the basis that it was open to the Commissioner to defer making decisions on the objections, so as to allow the MAP to progress at the taxpayers’ request. When and why the Commissioner changed his view and decided to issue objection decisions was not explained in the evidence. While it did not have to be, the change in the Commissioner’s position exposes his argument, in the appeals, that he was merely issuing the objection decisions because he was duty bound to do so, as an ill-conceived submission diverting attention from the fact that the Commissioner decided to take a step that would force the taxpayers to elect either to bring domestic proceedings in 60 days and risk one or both of the competent authorities suspending the MAP, or to forever forego domestic appeal rights and place all their eggs in the MAP basket.
The Full Court also noted that the Commissioner made certain arguments in his Notice of Contention, which in oral and written submissions were all but abandoned. The Appeal Decision explained that grounds 1(a) to (d) of the Notice of Contention were cast in terms that the taxpayer had no 'right' to commence and maintain a MAP and choose whether to proceed by the MAP or domestic proceedings, and conversely, that the Commissioner had a 'power and right' to suspend a MAP. However, the Commissioner made no written or oral submissions on these grounds, with senior counsel for the Commissioner stating in oral submissions there was no need for the court to decide those grounds.
Relatedly, despite using the language of 'rights' and 'power' in the Notice of Contention, the Full Court noted that the Commissioner endorsed the primary judge's view that the language of 'rights' was inapposite or unhelpful, and the Commissioner did not dispute that any such right or power was qualified by the court's power to grant a stay.
Further, ground 1(h) of the notice contended that a stay of the proceedings would 'stultify, or alternatively unduly restrict, the Commissioner's exercise of his power and right to suspend the [MAP]'. However, the Appeal Decision noted that '[b]uried in a footnote to the Commissioner's submissions on the appeal, and appearing in small, single-spaced type face' was a statement that the contention was not pressed. The Full Court said it was 'inappropriate' for the abandonment of a ground stated in a Notice of Contention to be buried in such a footnote.
In light of these comments, it seems less likely that, going forward, the Commissioner will assert a right to compel taxpayers to choose between MAP and their domestic appeal rights (in the manner he did in these proceedings).
Following the Appeal Decision, the Commissioner faces a higher bar in opposing stay proceedings in circumstances where the taxpayer has commenced protective proceedings whilst simultaneously requesting a stay pending the resolution of their MAP.
Given that any MAP (and arbitration, if applicable) is not binding on the taxpayer,13 taxpayers who seek resolution pursuant to a double taxation remedy as their first choice may benefit from increased optionality, so that they can see the output of the MAP or binding arbitration process as between the competent authorities and then decide whether to accept it or to progress with their domestic litigation.
However, Australia's Part IVA provisions (which include the MAAL and DPT) are not subject to the double taxation treaties and the ATO's position is that it will not resolve a case through a MAP to the extent that anti-avoidance provisions are engaged.14 Accordingly, the Appeal Decision may potentially focus more importance on the application of the anti-avoidance provisions to taxpayers' disputes where a MAP or arbitration process is otherwise available.
Footnotes
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Oracle Corporation Pty Ltd & Ors v FCT [2024] FCA 1262 (the First Instance Decision).
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This decision is consistent with the UK First-tier Tribunal decision of Glencore Energy UK Ltd v HMRC [2019] UKFTT 0438 (TC). The taxpayers in that case had commenced MAP under the double taxation treaty between Switzerland and the United Kingdom, and sought a stay of the proceedings in the United Kingdom, requesting that the Swiss competent authority and HMRC first try to resolve the dispute through the MAP, with arbitration as a back-stop. The taxpayer in that case put forward reasons similar to those in this decision that, in accordance with the OECD Commentary and international treaty obligations, it was intended for the taxpayer to be able to choose whether to proceed with its domestic legal rights or via a MAP. The Tribunal in that case granted the taxpayers a stay of their DPT and corporate tax appeal proceedings, pending the resolution of MAP.
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The Commissioner asserted that such a judicial determination would assist with resolving friction with the United States owing to differences between the United States competent authority's and the Commissioner's approach on what constitutes a royalty for the purpose of double taxation treaties, adducing two letters sent by the US Treasury Department regarding their 'strong concerns' about the Commissioner's approach: see First Instance Decision at [63]-[64] and Appeal Decision at [87].
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Article 26 of the DTA, as amended by Article 19 of the MLI; First Instance Decision at [16], [26], [73]; Appeal Decision at [23] and [36].
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Article 26 of the DTA, as amended by Article 19 of the MLI.
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[2025] HCA 30; (2025) 99 ALJR 1211.
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See, e.g., Article 26 of the DTA, as amended by Article 19 of the MLI.
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First Instance Decision at [25]-[29], Perram J citing: Commissioner of Taxation v Indooroopilly Children Services (Qld) Pty Ltd [2007] FCAFC 16; 158 FCR 325 at [3]-[7] per Allsop J (as his Honour then was) (Stone J agreeing at [1] and Edmonds J agreeing at [48]); paragraph 27 of the OECD's Commentary on Article 25 Concerning the Mutual Agreement Procedure’ in Model Tax Convention on Income and Capital: Condensed Version (OECD Publishing, 2017) (the Commentary); North Sea Continental Shelf Cases (Federal Republic of Germany v Denmark; Federal Republic of Germany v Netherlands) (Judgment) [1969] ICJ Rep 3 at 85(a); and the reservations made by Ireland and Australia in Article 19(12) of the MLI.
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First Instance Decision at [34]-[36], [38] , Perram J citing: s 14ZZN of the Taxation Administration Act 1953 (Cth); Article 26(1) of the DTA (prior to the adoption of the MLI); Article 16(1)-(2) and 19(4)(b)(i) of the MLI; [193] and [217] of the OECD's Explanatory Statement to the MLI (adopted on 24 November 2016 (Explanatory Statement); [4] of the OECD’s Making Dispute Resolution Mechanisms More Effective, Action 14 – 2015 Final Report (OECD Publishing, 2015) (Action 14 Report); [17], [76]-[77] of the Commentary.
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See above; First Instance Decision at [40], Perram J citing: [51] of the Action 14 Report; [44] of the Commentary.
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First Instance Decision at [42], Perram J citing [44] of the Commentary.
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[2021] FCAFC 122; (2021) 286 FCR 105 at [97] and [108]; Appeal Decision at [66].
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Article 26 of the DTA, as amended by Article 19 of the MLI.
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Section 177B(1) of the Income Tax Assessment Act 1936 (Cth); section 4(2) of the International Tax Agreements Act 1953 (Cth).