HMRC and HM Treasury consultation on extending royalties withholding tax

Tue 12 Dec 2017

Background

The UK government has been reviewing corporate tax and the digital economy (see its position paper on the matter).  That paper proposed a staged approach to bringing digital businesses, such as online markets and social media platforms, within the scope of UK tax, where value is created, but not taxed, in the UK.  Indeed, this value may not be taxed anywhere, by routing the payments to a low or no tax jurisdiction.

The short term solution proposed in the above mentioned paper is to introduce a withholding tax (WHT) on royalties arising in respect of payments to connected parties for the exploitation of rights in the UK. Crucially, it will not be necessary for there to be a UK taxable presence for this WHT to arise. Whilst the primary target is digital businesses, the proposals would apply to any royalty payments within scope.  The intention is for the proposed changes to be effective from April 2019.

These changes will build on the previous extension of WHT on a wider range of IP in FA 2016 – which applies to payments in respect of customer related IP.

Consultation document ‘Royalties withholding tax’

On 1 December 2017 HMRC and HM Treasury issued a consultation, providing detail of the proposals for expanding the scope of withholding taxes on royalties. The stated aim of the consultation is to target intra-group arrangements that achieve an artificially low tax rate that is distortive to markets in which they operate, including the UK.

Amendments to Income Tax (Trading and Other Income) Act 2005 will bring within the scope of income tax withholding tax (WHT) payments made by a non-UK resident entity (A) to another non-UK resident entity (B), where A makes the payment in respect of intellectual property exploited by A to make sales to UK customers. Under existing legislation there is no UK source to this payment as no UK person makes the payment and there is no UK permanent establishment (PE), nor an avoided UK PE for diverted profits tax purposes.

The proposal is for the existing rules, to be amended to treat payments made for the exploitation of IP or certain other rights in the UK as always having a UK source. Thus, it will not matter if the payer is neither a resident company nor has a UK PE (or avoided PE).

The proposed measure will only apply to payments between connected parties. It will also only apply where the payments are made to jurisdictions with which the UK either does not have a double tax treaty, or has one which does not include a non-discrimination article.  The measure will contain anti-abuse and anti-forestalling rules to prevent treaty shopping by routing payments through a jurisdiction with which the UK has an appropriate double tax treaty.

Where the amended provisions apply the tax rate to be applied will be the highest rate under ITTOIA 2005, ITA 2007, diverted profits tax and the changes made by this measure. For companies, therefore, the tax will not be less than the 25% rate for the diverted profits tax (FA 2015 s.79).

Where the group already has a UK taxable presence, the obligation to make returns in respect of payments made from the entity with the liability would fall on that UK entity and would be made through the CT61 quarterly return process.  Where the group does not have a UK presence, a separate submission and UK tax reference and form CT600H (or similar) will be required.  There will be a penalty regime, which could apply to the UK resident entity.  In the event of non-payment, collection of any tax and penalties would be from any UK related parties through extended joint and several liability provisions.  Where there is no UK presence, the UK would make use of its international agreements to enforce collection.

The consultation runs until 23 February 2018. To discuss the tax issues around royalty payments relating to UK business activity, please get in touch with a member of the Mazars International tax or Corporate tax teams.