In the 2017 Autumn Budget, the UK Government undertook to publish a consultation on extending the obligation to account for withholding tax in relation to royalty payments.
This is part of the Government’s response to perceived challenges with the taxation of the digital economy, although it is noted that these proposals are intended to have a wider impact than just the digital economy.
Accordingly, on the 1 December last, the Government launched its consultation in this area which will run until February 2018 with the Government intending to publish a summary of the responses and draft legislation later in 2018. This consultation is intended to bring about the design and implementation of new rules for extending royalty withholding taxes to payments in respect of UK intellectual property made to connected parties situated in low or zero-tax jurisdictions.
Rules were introduced in Finance Act 2016 (FA16) to ensure that all royalties arising in the UK would be subject to the deduction of income tax (IT) at source unless the UK has explicitly given up its taxing rights under an international agreement.
The deduction of UK tax at source applies to royalty payments in respect of intellectual property (‘IP’) where the usual abode of the person entitled to the payments is outside the UK (section 906, Income Tax Act 2007).
With this consultation, the Government is now proposing to extend the regime further to ensure that payments for the exploitation of certain intellectual property (IP) or other rights made to connected parties will be subject to what it considers appropriate taxation.
The government's announcement contemplates an expansion of the withholding obligation so that it will apply to royalty payments and payments for certain other rights, made to low or zero-tax jurisdictions in connection with sales to UK customers, but regardless of where the payer is located.
The preferred approach is to target payments for exploitation of intellectual property and intangible assets of any description in the UK, rather than defining specific types of payments.
The proposals will include an anti-abuse rule designed to capture arrangements introduced with a main purposes of avoiding a liability under the proposals. It is intended that these measures would apply to payments made after April 2019, even if the arrangements are made before that date.
Finance Bill 2019
The government intends that draft legislation will be introduced in the Finance Bill 2019, and that the related changes will have effect from April 2019.
Most commentators consider these developments to be a strong indicator of the government's general approach to clamping down on aggressive tax planning by various digital multinational giants, all of which has of course been the focus of so much adverse media publicity of late.
If and when they go into effect, these intended new measures are expected to raise £200m a year over the next four years. As the Chancellor, Philip Hammond told MPs on Budget day, “this does not solve the problem, but it does send a signal of our determination” in dealing with perceived aggressive practises in this area.