A consultation document published on 1 December 2017 provides further details of proposed new UK tax legislation. It will extend the scope of withholding tax to royalties and other payments made to a connected person not resident in the UK and will apply from April 2019.
The aim of the proposed measure is to ensure that royalties and similar payments made to tax havens are subject to UK income tax, regardless of whether the payer has a taxable presence in the UK.
The scope of the proposed measure is very wide. It will bite in situations where a non UK resident company exploits intangible assets held offshore to make sales in the UK, but does not have a UK permanent establishment, or an avoided permanent establishment for diverted profits tax. For example, in the diagram above, if Company A pays a royalty to Company B (a connected party), resident in a low tax jurisdiction, Company A will need to account to HMRC for withholding tax on the royalty payment. It is proposed to use transfer pricing rules to determine whether the parties are connected for these purposes.
It is proposed that the measure will not apply where there is an applicable double taxation treaty with a non-discrimination clause. However, this would leave payments to certain high tax territories where there is no double taxation agreement with the UK (for example, Brazil) within scope. This would be contrary to the intention that the proposed measure applies to payments to low tax, or no tax, countries. The Government is aware of this and is seeking views on the impact of this in the consultation.
Where royalty payments are also made in connection with sales in other countries, it is expected that an apportionment of the royalty would need to be made on a just and reasonable basis to determine the taxable element relating to the UK. Generally, the apportionment will be pro rata to UK sales.
The Government is seeking views on the proposed scope of the measure. It has suggested a broad generic approach, for example to define the exploitation of intellectual property and intangible assets of any description. The Government considers this approach would give certainty compared with the alternative of providing a listing of specific types of payments falling within the provision.
One notable aspect of the proposed measure is that if a higher tax liability could result under the existing income tax provisions, or the diverted profits tax regime, the highest tax liability will result.
The consultation document proposes an anti- abuse rule which will cover payments made through conduits, and the legislation will include an anti-forestalling rule.
The Government also acknowledges that double taxation may arise as result of the proposed measure, for example where the company making the payment has a local withholding tax obligation. Double taxation may also arise as a result of third country taxation, for example under CFC rules in the group parent jurisdiction.
Compliance and reporting
The existing CT61 framework is proposed to be used for the reporting and collection of income tax. In addition, it is proposed that groups with a UK presence will be required to detail royalty payments made by a group member on Form CT600H. This potentially would place an onerous compliance burden on UK subsidiaries of multinational groups particularly where they do not have access to the information to be reported. A registration and similar notification process will also be introduced for groups without a UK presence.
The Government also proposes joint and several liability for a group that has a liability under the proposed measure. This would enable a liability of a non UK resident company to be collected through any related party with a UK presence. This is an unusual feature in UK corporate tax law, particularly as the arrangements creating the liability may be outside the control, or even knowledge, of a UK company.
The closing date for comments on the consultative document is 23 February 2018.
Read more on Draft Finance Bill 2017-18.