Finance Act 2019 introduced a new income tax charge at 20% on amounts received in connection with the exploitation of intangible property by foreign companies - ‘Intangible property’ is defined very broadly for these purposes.
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) (meaning a DTA that does not contain a qualifying non-discrimination article). It 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.
The limited exemptions to the rules are the following:
- 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)
- If 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), or
- 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.
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, on 24 May 2019 draft regulations amending the legislation and guidance were published for consultation. It is anticipated that the final regulations will be enacted in autumn 2019. Below is a summary of the two sets of main amendments proposed to the legislation:
- Amendments effective retrospectively from 6 April 2019:
- The definition of UK sales will be modified so 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 advert is aimed at UK consumers.
- An exclusion for sales made by third parties will be introduced where the intangible property (or associated rights) in question makes an insignificant contribution to the UK sale.
- A new territory exemption will be introduced for companies resident in jurisdictions with which the UK does not have a DTA and that do not pose a risk to the statutory purpose of the legislation. These jurisdictions are still to be listed and the Commissioner for HMRC will have the power to add or remove jurisdictions from the list.
- An exemption will be introduced to 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).
- Amendments effective from the date that the amendments are enacted:
- The scope of the income tax charge will be extended to low tax jurisdictions where the non-UK person is resident in a jurisdiction with which the UK has a full tax DTA, but by virtue of the provisions of the DTA no tax relief is available for the person (for example, because the person or the income is excluded under the terms of the DTA).
- The definition of residence will be amended so that entities that are resident in a full DTA territory but only liable to tax there on a source or remittance basis will remain within the scope of the legislation.
- An exemption will be introduced to make it clear that where a partnership itself is appropriately taxed on the relevant income in a jurisdiction with which the UK has a full DTA, the individual partners will not also be subject to the tax.
The list of territories that are considered to have full DTAs with the UK as contained in HMRC’s International Manual was updated on 21 May 2019. Whilst, strictly, this list is published for the purposes of the SME exemption in the transfer pricing legislation, the same language used to define a full DTA is also found in the ORIP legislation and it is not unreasonable to suppose that HMRC will take the same view for these purposes. 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, Bermuda, the British Virgin Islands and the Cayman Islands. It should also be noted that Hong Kong, which was on the previous version of the list, has been removed.
In light of the draft regulations and guidance, any multinational business doing business in a low- or no-tax territory, where they are part of a supply chain selling directly or indirectly into the UK, will need to reconsider whether they will be affected by the legislation (bearing in mind the updated list of territories considered to have a full DTA with the UK).
Groups should keep in mind that the 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 taking action intended to take them out of the scope of these rules.