The United Kingdom Government recently concluded a public consultation on a new measure intended to tackle tax base erosion and profit shifting (BEPS) and ensure that companies operating in the digital economy are taxed “appropriately.”
The measure in question is intended to extend the UK withholding tax regime to certain outbound royalty payments connected with the exploitation of IP rights in the UK. However, while other jurisdictions have since proposed similar types of measures, tax practitioners in the UK have cast doubt over how the tax can be applied.
Summary Of Tax
The consultation paper states that the tax is aimed at intra-group arrangements that achieve an artificially low effective rate that is distortive to competition in the markets in which they operate, including the UK.
The Government says that such payments should be brought into the UK tax net because, typically, the company paying the royalty is entitled to a tax deduction, while the receiving company is likely to be registered in a low- or no-tax jurisdiction.
However, as such transactions are likely to take place between two entities that are not resident in the UK, questions have been asked about how the tax will be collected and enforced.
The Government acknowledges that the proposal as it stands could fall short of the UK’s international legal obligations by conflicting with its double tax avoidance treaties. As such, it will apply only to payments made to entities in jurisdictions with which the UK does not have a tax treaty. Potentially, therefore, payments made to jurisdictions that tax royalty income could be taxed twice.
What’s more, the Government concedes that while this measure will predominantly affect digital businesses, it may also affect groups engaged in other sectors.
According to a recent report from the House of Commons Treasury Committee on the 2017 Autumn Budget, there is a "general consensus" among representative bodies that provided evidence to the committee that the proposal’s impact is "uncertain," and that the timescale for consultation and implementation is "limited."
The Association of Chartered Certified Accountants (ACCA) said the measure
clearly demonstrates the characteristics of a short-term interim measure rather than a long-term solution.
ACCA evidence states that “as the relevant Treasury position paper acknowledges, there are significant challenges around identifying the businesses and transactions which should properly be the target of such measures.”
ACCA also criticized the limited time available for submissions to be made to the consultation.
ACCA's concerns were largely echoed by the Chartered Institute of Taxation (CIOT) in written evidence to the committee, which observed that there are “practical and logistical” reasons why such a measure hasn’t been introduced before.
In its evidence, CIOT said
there are difficult questions to address around how the UK will seek to tax payments made between non-UK resident companies and other third-country jurisdictions with which the UK does not have a tax treaty.
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Since the UK proposed the measure, the Netherlands and Singapore have announced measures that also seek to extend withholding taxes to certain outbound payments. This suggests that more jurisdictions may follow suit as they seek to reduce opportunities for corporate groups to engage in cross-border tax avoidance.
However, as far as the UK measure is concerned, taxpayers and practitioners must be hoping that changes are made to ensure that the final version of the legislation operates effectively, so that it does not result in unintended consequences.