The UK introduced a new income tax charge at 20% with effect from 6 April 2019 on amounts received in connection with the exploitation of intangible property by foreign companies in low tax territories. ‘Intangible property’ is defined very broadly for these purposes and is much wider than intellectual property.
As the rules were enacted quickly, the legislation included a power of amendment by regulation before 31 December 2019 to address any deficiencies or unintended consequences in the legislation. Consequently, regulations have recently been enacted amending the legislation, and guidance has also been issued.
Companies within the rules
Subject to certain limited exemptions, the charge applies to companies that are resident in a territory with which the UK does not have a ‘full’ double taxation arrangement (DTA). For these purposes, a full DTA is one with a sovereign state and which contains a non-discrimination article (modelled on the one in the OECD model convention).
The list of territories that are considered to have full DTAs has been published in the draft ORIP guidance. It is noteworthy that the new UK treaties with Jersey, Guernsey and the Isle of Man are not listed as ‘full’ treaties. Other territories with which the UK does not have a ‘full’ DTA include, for example, Hong Kong, Bermuda, the British Virgin Islands and the Cayman Islands.
Certain companies resident in a full DTA territory will also remain within the charge to tax if they are subject to tax there only on sources within that territory, or on a remittance basis, or if they are excluded from treaty benefits.
Revenues subject to tax
The ORIP charge applies to the proportion of the foreign resident’s revenues (not profits) that can be regarded as derived from the exploitation of intangible property, to the extent the intangible property is used directly or indirectly to enable, facilitate or promote UK sales of goods or services. For these purposes, it does not matter whether the ultimate sale to a UK customer is made by the offshore company, a related party or an entirely unrelated third party - so the legislation is extremely wide.
In the following example, a multinational group owns intellectual property (IP) in Bermuda. Its Bermuda company licenses the IP to it company in Ireland for which the Irish company pays royalties of £100m per year. The Irish company operates as a master distributor and utilises Limited Risk Distributors in various markets (including the UK).
Bermuda is not a full treaty territory and, therefore, when the Bermudan company receives UK-derived amounts in the year we have to calculate the apportionment for the ORIP as follows:
UK-derived amount equals £100m x £100m = £25m
The ORIP charge is therefore £25m @ 20% = £5m
There are some limited exemptions to the rules, as follows:
- A £10m de minimis UK sales threshold (to determine if this applies, the full supply chain needs to be considered in order to identify the value of any eventual sales into the UK, and it is also necessary to take into account sales made by connected parties).
- All, or substantially all, of the trading activities generating the income have always been undertaken in the low tax jurisdiction and the intangible property was not acquired from related parties (this requires consideration of activities done by any person, at any time, for the purpose of creating, developing or maintaining any of the relevant intangible property and rights related to it).
- The amount of tax paid by the foreign resident in respect of UK derived amounts is at least half of that which would otherwise be levied under the UK charge to income tax under this measure.
- Income derived from UK sales made by third parties is excluded from charge where the intangible property (or associated rights) in question makes an insignificant contribution to the sale.
- The Government may exempt specific territories with which the UK does not have a full DTA and that do not pose a risk to the statutory purpose of the legislation. Any such jurisdictions are yet to be listed.
- The regulations ensure that where there are potentially multiple charges on companies within the same group in respect of the same income (as could be the case in complex supply chains), the tax is only charged once (subject to anti-avoidance provisions).
The regulations also clarify that the definition of UK sales makes clear that sales to UK persons acquiring and reselling goods or services without making any modification (such as distributors or resellers) will not be considered to be UK sales if they are sold on to parties overseas. A sale of advertising is a UK sale where the advertisement is aimed at UK consumers.
A targeted anti-avoidance rule (TAAR) gives HMRC the power to counteract arrangements which aim to circumvent the legislation. The TAAR has been in effect since the date the legislation was announced in the 2018 Budget. Groups should therefore be cautious about reorganisations intended to take them out of the scope of these rules.
Companies located in territories that have treaties with the UK may be able to claim treaty relief even if the treaty is not a “full” DTA. In order to do so, they will need to meet all the usual criteria for claiming treaty benefits including, where relevant, satisfying the principal purpose test. In such cases, companies may need to consider making a formal claim in writing to HMRC.
In light of the regulations and guidance, any multinational organisation doing business in a low- or no-tax territory, where it is part of a supply chain selling directly or indirectly into the UK, should consider whether it will be affected by the legislation.
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