IBM has lost a AUD55m federal court case against the Australian Tax Office (ATO), a decision which could have major ramifications for other technology companies operating in Australia.

In July 2009, US based IBM Corporation and its Australian subsidiary filed a lawsuit against the Australian Commissioner of Taxation disputing tax demands raised of AUD26m and AUD29m on earnings from the Australian subsidiary in 2004 and 2005.

IBM's argument was that the Australian subsidiary had signed a software licensing deal in 1987 that entitled it to use and distribute software that had been designed in the US in return for 40% of the revenue it received. The case hinged on whether these monies were 'royalties' under the double taxation agreement between the US and Australia. IBM argued that under the nature of the licensing agreement, most of the payments could not be classified as royalties and were therefore not liable to withholding tax.

Justice Annabelle Claire Bennett, however, dismissed the claims and ruled that the company should pay the taxes claimed by the ATO and also pay the ATO's legal costs. This decision could affect Australian subsidiaries of other large IT companies and how much they pay for goods from the parent company. IBM is expected to appeal against the decision.