In 2003, the Employers’ Association of the Software and Services Industry (ANIS) started the process of revising existing regulations on royalty to be paid on software imports.
ANIS member companies and distributors of software solutions which were subject to royalty payment requested ANIS assistance with this issue, because they needed clearer guidelines as to when royalty payments were mandatory for the purchase of software programs.
In 2003, royalty payments were regulated by the Fiscal Code and the Methodological Application Norms – Law 571/ 2003. Exemptions from copyrights payment applied in the following two situations:
Under these regulations, companies distributing software applications/ licenses were treated like the buyers/ holders of rights over the use of a product (actually these companies were temporarily holders of the right to use, which they ceded upon acquisition by the end user).
Steps undertaken to reform the practice of royalty payments on software imports
ANIS coordinated the creation of a working group that included representatives of the association and of companies interested in this initiative, as well as lawyers and fiscal consultants. The working group prepared a position paper which explained the current situation for license distributors with respect to holding and transferring the right to use software programs and made recommendations on how to reform this system.
Recommendations of ANIS for amending the Fiscal Code Project(source: www.hamorsoft.ro)
The definition of royalty (as formulated in Title I, Chapter III, Article 7, Point 28, letter b) as the remuneration paid in exchange for the use or the right to use the object of an intellectual property right (i.e. invention, innovation, patent... or software) is incomplete and unclear.
When the holder of the intellectual property title cedes to another person the right to use an invention or a computer program’s source code, for instance, in order to be integrated into a product that would be, depending on the case, copied and launched on the market, he cedes an income source, and, in exchange, obtains a remuneration bearing royalty title.
The royalty represents the remuneration obtained in exchange for handing over an income source. In Romanian legislation, this definition is also met by concessions (Law no. 219 of 1998), as they also qualify as remuneration for handing over a similar income source (the object of the concession).
In relation with acquisitions of computer programs (software), there are two possibilities:
1. the possibility to obtain the right over the use of a computer program for the purpose of multiplying it and trading the resulting copies, or for the purpose of integrating the computer program into a new program which would afterwards be multiplied and recovered (which is equivalent to handing over an income source, thus justifying the “royalty” name for the remuneration received by the holder of the right); or
2. the possibility to utilize the computer program for personal use, as is and without any modification, or to trade it as is (in this case, the possibility to multiply the computer program in itself or as a part of a new program in which it should be integrated no longer exists; consequently, no income source which would justify the royalty is ceded anymore, but a simple product, which justifies the payment of a simple price).
The members of the Employers’ Association of the Software and Services Industry request that computer programs acquired for operational purposes only be exempt from royalty tax.
ANIS Proposal (November 18, 2003)
ANIS proposes that article 7, point 28, Title I of the Fiscal Code project be amended to read as follows:
„Royalty is any amount required to be paid in money or in kind for the use of, or the right to use, any of the following:
a) a copyright of a literary, artistic or scientific work, including of software, films or tapes for radio or television broadcasts, as well as for carrying out audio or video recordings
b) any patent, invention, innovation, license, trademark, trade name, franchise, drawing, design, model, plan, sketch, secret formula or production process
c) any transmission, including public transmissions, direct or indirect, by cable, satellite, optical fiber or other similar technology
d) any industrial, commercial or scientific equipment, any movable goods, means of transport or containers
e) any know-how;
f) the name or image of any natural person or other similar rights with respect to a natural person.
In addition, a royalty includes any amount required to be paid in money or in kind for the right to record or broadcast in any manner performances, shows, sporting events or other similar activities.
For the purpose of this law, the remuneration in money or in kind paid for the acquisition of software that is intended exclusively for its operation, without modifications other than those necessary to install, implement, store or use the copy of such a computer program, is not considered a royalty.
In addition, for the purpose of this law, the remuneration in money or in kind paid for the acquisition of the entire copyright of a computer program shall not be considered a royalty.”
Reasoning
According to Title I, article 7, point 28 of the Fiscal Code project, a royalty is „any amount required to be paid in money or in kind for the use of, or the right to use, any of the following:
g) a copyright of a literary, artistic or scientific work, including of films or tapes for radio or television broadcasts, as well as for carrying out audio or video recordings;
h) any patent, invention, innovation, license, trademark, trade name, franchise, drawing, design, model, plan, sketch, secret formula or production process, or software;
i) any transmission, including public transmissions, direct or indirect, by cable, satellite, optical fiber or other similar technology;
j) any industrial, commercial or scientific equipment, any movable goods, means of transport or containers;
k) any know-how;
l) the name or image of any physical person or other similar rights with respect to a physical person.
In addition, a royalty includes any amount required to be paid in money or in kind for the right to record or broadcast in any manner a performance, show, sporting event or other similar activity.”
The Model Agreement proposed by OECD to avoid double taxation defines royalty as „payments of any kind received for the use or the right to use any copyright protecting a literary, artistic or scientific work, including cinematography films, any invention patent, trademark, design, model, plan, secret formula or production process, or information related to industrial, commercial or scientific experience.”
According to the comments of OECD from January 2003, software is a program or a series of programs comprising instructions necessary for a computer to function (operational software) or to carry out certain functions (application software). From the point of view of defining royalty, the software is employed as a literary/scientific work. Moreover, according to Romanian legislation (Law 8/1996 on Copyright and Neighboring Rights, article 7, point a), computer programs are assimilated into literary works.
From a fiscal point of view, the character of the payments carried out as part of the transactions implying a software transfer depends on the nature of the rights which the buyer acquires pertaining to the use and exploitation of the program, that is if the buyer receives full or partial rights over the copyright as such or full or partial copyright over the copy of a computer program(according to the distinction presented in Point 13 of the Comments).
Thus, according to point 13.1 of the comments of OECD regarding Article 12 (Royalty) of the OECD Model Agreement, the payment for the acquisition of partial rights over the copyright represents the royalty if the payment is made to obtain the rights of use that, if carried out in the absence of such a transfer agreement, would represent a copyright violation. As further shown in Point 13 of the Comments, the payment for the acquisition of such rights represents the payment for the right to use the copyright which covers the program and, consequently qualifies as royalty, according to Article 12 of the Model Agreement.
The next section presents the fiscal treatment of payments for software transfers, as specified in the international guidelines (OECD Comments, 2003 edition), with focus on two of the situations most frequently encountered in practice and where the payment for the transfer does not represent royalty for the purpose of Art. 12 of the OECD Comments.
1. The acquisition of software for operational purposes (the use of copyright is not acquired)
According to point 14 of the OECD comments regarding Article 12 (royalties) of the OECD Model Agreement, payments made for the acquisition of software are not considered royalties as long as the rights acquired in relation with the copyright protecting a computer program are limited to those necessary to allow the user to operate the program. For instance, the user may be granted limited rights to reproduce the program as part of this type of transactions. The Comments add that this represents the current situation with regard to acquisition of a copy of a computer program. Thus, the user is allowed to copy the program, for example on the computer’s hard-disk which he uses or for archiving purposes. OECD Comments conclude that payments made for the acquisition of such rights represent commercial income (under Art. 7 of the Model Agreement), and not royalties (under Art. 12 of the Model Agreement).
2. The acquisition of the full copyrights related to a software
According to point 15 of the OECD comments regarding article 12 (royalties) of the OECD Model Agreement, payments made for the entire transfer of the copyright in relation to a software cannot be considered royalties, since they are not payments made for the copyright use for that software, but for the full acquisition of this copyright. In this case, according to the OECD comments, the transaction must be treated as an acquisition of goods, and the payments associated with it do not qualify as royalty.
Given the above considerations, for the purpose of achieving consistency between the relevant provisions of the Fiscal Code and other internal legal provisions (Law 8/1996), as well as international fiscal policies, we propose that the royalties related to the software be included in point a) of the definition included in the Fiscal Code project, and that the following clarifying language be added either as a new paragraph or a new article:
„The remuneration in money or in kind paid for the acquisitions of software that is intended exclusively for its operation, without modifications other than those necessary to install, implement, store or use the copy of such a computer program, is not considered a royalty for the purpose of this law. In addition, for the purpose of this law, the remuneration in money or in kind paid for the acquisition of the entire copyright of a computer program shall not qualify as royalty.”
Article 7, Point 28, letter b):
„28.b) any patent, invention, innovation, license, trademark or trade name, franchise, drawing, design, model, plan, sketch, secret formula or production process, or software. For the purpose of this law, the remuneration in money or in kind paid for the acquisitions of software that is intended exclusively to the distribution as such or to the use as such, without modifications other than those necessary to install, implement, store or use the copy of such software is not considered royalty.”
The Romanian Senate accepted this reformulation, including the following paragraph:
„For the purpose of this law, the remuneration in money or in kind for the acquisitions of software intended exclusively to operate such software, without modifications other than those necessary to install, implement, store or use it, is not considered royalty. In addition, for the purpose of this law, remuneration in money and in kind paid for the entire acquisition of copyrights protecting a computer program shall not be considered royalty.”
ANIS sent the position paper together with an introductory letter to the Ministry of Public Finance (Department for Legislation on Direct Taxes), the National Agency for Fiscal Administration (The Legal Department Direction) and the ICT Commission of the Romanian Parliament.
The Department for Legislation on Direct Taxes (Ministry of Public Finance) and of the Legal Department (National Agency for Fiscal Administration) invited the working group to present the position paper and convinced the government agencies to reform the existing regulations.
Following this initiative, the Methodological Application Norms were amended for the purpose of clarifying the fact that the simple purchase and resale of computer license/ program „without modifying, multiplying or distributing it, cannot be defined as having royalty liabilities” and implicitly tax liabilities from royalty income.