A Shifting Landscape: International Taxation of Software Payments

As the digital economy grows, so does the complexity of taxing it. Nowhere is this more apparent than in the international taxation of software payments. A recent article by Giammarco Cottani and Nadia C. Altenburg outlines how diverging national approaches to taxing software are creating a risky and uncertain landscape for multinational enterprises (MNEs) — particularly those in tech.

The Core Issue: Business Income or Royalties?

At the heart of the debate is how to classify software payments. Are they business profits (which are often tax-exempt under treaties) or royalties (which can be taxed at source)? The answer varies dramatically by country. According to OECD guidance, the difference depends on the rights granted — limited use generally qualifies as business income, while the right to reproduce, distribute, or modify software may be seen as royalty income.

Diverging National Approaches

Several countries have taken more aggressive stances:

• Italy insists that licensing software involving reproduction or distribution rights counts as a royalty — and applies a steep withholding tax.
• Germany has claimed taxing rights over IP registered in its territory, even when no German party is involved.
• Spain expands royalty definitions to include customized software for business use.
• Australia recently proposed rules that classify even basic software distributions as royalties, contrary to longstanding OECD positions.

These approaches often conflict with international treaties and with U.S. expectations, leading to rising tensions.

In response, the U.S. government has taken a firm stand. In a February 2025 memorandum, the White House criticized what it views as discriminatory and extraterritorial taxes targeting American tech firms. The administration has signaled it may use retaliatory trade measures — including tariffs and tax penalties — to counter such policies.

What's at Risk

This divergence could have serious consequences:

• Increased compliance costs for global companies navigating inconsistent rules
• Potential trade conflicts between major economies
• Greater legal uncertainty for cross-border digital transactions

A Call for Clarity and Cooperation

The authors argue for international alignment — either through the OECD, the UN, or bilateral negotiations — to reduce friction and avoid damaging disputes. They also advise MNEs to review their software agreements carefully, ensuring they clearly distinguish between distribution rights and IP exploitation, which affects how payments are taxed.

Conclusion

As governments seek to tax the digital economy more effectively, software payments have become a new front in the global tax debate. Without a common approach, the risk of conflict rises — not just between tax authorities and companies, but between entire countries. For policymakers and businesses alike, the message is clear: collaboration and consistency are more important than ever.