There is ongoing debate regarding the taxation of digital businesses at a UK, EU and OECD level. The UK Government is looking to lead the debate at an international level, and intends to implement a new withholding tax on certain intangibles related payments from April 2019.
HMRC issued a consultation document on the design of the new rules in December 2017 (to which BDO has responded). While there is the possibility that the design of the rules will be refined as a consequence of the consultation, the UK Government appears committed to moving forward with the concept, so it will be important for businesses to review the potential impact of these proposals.
The rules are proposed to apply where a non-UK resident person makes a payment for the right to use or exploit intangible property in the UK (not yet precisely defined, but intended to be broad), and the recipient is resident in a territory with which the UK does not have a double tax treaty with a non-discrimination clause. Territories without a relevant treaty include Bermuda, BVI, Cayman Islands, Gibraltar, Guernsey, Jersey, Isle of Man and Brazil.
The measures purport to target intra group arrangements that achieve an ‘artificially low’ rate of tax. However, the approach proposed in the consultation document makes no mention of any intention to test the motive or commerciality of an arrangement. As such, entirely commercially driven structures could be affected.
The proposed approach to implementation of the provisions suggests that the Government wants to apply the rules in much wider circumstances than just situations where royalty payments achieve nil or low effective tax rates for groups (the narrow objective stated in the consultation). Reading between the lines, there appears to be a broader desire to apply UK tax to income arising from the exploitation of intangibles in the UK (unless treaty obligations override such an approach). This overlaps with the UK Government’s activity on the reform of the taxation of digital businesses.
US tax reform
The consultation document was issued before the recent US tax reforms were finalised and, therefore, does not reflect their impact on the international tax landscape. Among many changes, the US tax reforms have introduced a mandatory tax on accumulated offshore earnings, as well as significantly tightened controlled foreign company (CFC) provisions that will tax low taxed intangible related income on an arising basis. There is no provision in the consultation document of a credit being made available where a CFC charge has been levied on the profits of the recipient entity so there is a risk of multiple taxation arising.
The proposed measures could introduce onerous reporting requirements on businesses, even where no withholding tax is ultimately levied. Further, the nature of the tax (a tax imposed at source on payments by non-UK tax residents) will make enforcement of both reporting obligations and the collection of tax due practically challenging.
There is also a risk of the new measures resulting in a proliferation of similar measures in other jurisdictions. Some territories already have an established approach of applying an effective minimum taxation in considering the deductibility of payments: they could look to extend such provisions to withholding tax obligations. In such circumstances, given the competitive headline rate in the UK relative to other territories, UK businesses exploiting intellectual property across international borders could suffer. In particular, the even lower effective rate under the patent box regime could cause challenges if, for example, an international standard of a threshold relative to the foreign jurisdiction domestic rate emerged.
Overall, as we highlighted in our response to the consultation, there is a need for further clarity about the arrangements that are being targeted to ensure an appropriate balance is struck between commercial motives, structural risk and the burden of tax collection and enforcement. We await further developments in these proposals. In the meantime, if you would like to discuss your group’s position, please get in touch with Ross Robertson.
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