The UK Government has recently released guidance and made some changes to a tax provision that is intended to tackle the use of structures in low-tax jurisdictions to reduce income tax payable on sales in the UK from intangible property.
At Budget 2017 the Government announced its intention to amend existing rules for withholding income tax on royalties and similar payments. One aim of the measure was to discourage multinational businesses from holding intangible property in low-tax jurisdictions separated from where the substantive economic activities that relate to it are carried out, resulting in little or no tax being paid on the income.
Following a consultation that ended in February 2018, changes were made to the proposed measure and it was titled the "Offshore Receipts in respect of Intangible Property measure", which is explained in detail here.
Essentially, the "offshore receipts in respect of intangible property" measure brings within the charge to UK income tax amounts received in a low-tax jurisdiction in respect of intangible property to the extent that the amounts are referable to the sale of goods or services in the UK.
Where a non-UK entity receives income from the sale of goods or services in the UK, and that entity makes a payment to the holder of intangible property in a low-tax jurisdiction, a tax charge arises, which is calculated based on the value of the sale of goods or services in the UK.
The Government says the measure is intended to reduce opportunities for large multinationals to gain a competitive advantage by holding their intangible property in low-tax offshore jurisdictions.
However, there are multiple exclusions that may result in a multinational business falling outside the measure's scope.
For instance, the measure does not apply in relation to low-tax jurisdictions that have a full tax treaty with the UK that includes provisions for the avoidance of double taxation and also a non-discrimination provision.
Further, a tax charge does not arise where the tax paid is at least half what would be due if the amount was taxable in the UK. There is also a £10m ($12.9m) de minimis UK sales threshold, meaning only the largest businesses doing business in the UK will potentially face the charge.
The measure also includes an exemption for income arising in entities that have not acquired their intangible property from related parties and where all, or substantially all, of the trading activities have always been undertaken in the low-tax jurisdiction.
The Government has sought to make the legislation watertight to avoid circumvention of the charge. In particular, the measure includes a Targeted Anti-Abuse Rule, effective from 29 October 2018, which is intended to protect against arrangements that involve the ownership of intangible property being transferred to another group entity resident in a full treaty jurisdiction.
Double Tax Relief
The legislation makes provision to relieve double taxation by introducing an exemption for instances in which more than one tax charge under the measure applies to the same income in respect of related entities.
Entities within the same control group during the relevant tax year will be jointly and severally liable for the tax due.
The measure applies to income receivable from both related and unrelated parties, effective from 6 April 2019. Under the regime, an income tax charge should be reported and collected under the existing Income Tax Self Assessment provisions, with businesses in scope required to complete SA700 "Tax return for a non-resident company liable to Income Tax" to make their annual return of the tax due.
In draft technical guidance released in October 2019, the UK Government explained that the definition of UK sales has been modified. In particular, the guidance specifies that, in determining whether a sale is provided in the UK or to UK persons, the primary legislation looks through persons who acquire and resell goods or services without making any change or modification (for example distributors or resellers). In relation to online advertising services, UK sales are defined by reference to the person to whom the goods or services being advertised are targeted.
Disclaimer: The blog does not represent taxation or legal advice and that independent advice should always be sought in respect of such matters etc.