Tax implications of computer software payment

Crossborder transactions with regard to the sale of computer software often raise tax controversies as to whether or not these are regarded as royalty payment.

In general, purchasers often categorize the sale of computer software as royalty payment and impose certain Withholding Tax with reference to the Tax Treaty articles.

However, is it correct to assume that software-related sale transactions shall result in royalty payment?

A question of rights

In order to determine if a transaction can be defined as royalty transaction, it is important to consider the legal rights that are received by the payor in exchange for the payment.

The rights can be limited to merely operating the software, or cover the copyright to publish, reproduce or transform the computer software.

If a purchaser is only allowed to operate the software program, or to resale in case of a distributor, then the transaction should be viewed as transfer of “copyrighted articles” rather than transfer of “copyrights”.

Terminology

The above is also consistent with the prevailing Indonesian Copyright Law. Since the term “copyrights” is not specifically defined in a Tax Treaty, recourse to a domestic law is also required to define the copyright terminology.

The Law refers to “copyrights” as the exclusive economic right to publish, reproduce, transform, distribute, perform, rent or publicly display the copyrighted article.

Conclusion

Therefore, if the sale of computer software does not provide the purchaser with any rights to reproduce, alter, transform, modify or exploit the software in any other form, it should not be regarded as royalty transaction. Therefore, such transaction falls within the scope of the Business Profit article in the Tax Treaty rather than Royalty.