The UK Government is consulting on the design of new rules which would expand the scope of UK WHT on royalties
On 1 December 2017 the UK Government launched a consultation on the design of rules to extend the scope of UK withholding tax (WHT), effective from April 2019. These rules would apply to payments made to connected companies holding intellectual property (IP) where these payments are made in connection with UK sales. They would apply even where the payer has no UK taxable presence. While the proposals were first trailed as part of the Digital Economy position paper, it is clear that their reach is far wider. Where the rules apply they have the potential to create a significant additional tax and administrative burden for affected groups.
Under existing rules, WHT on royalties can only arise where the payment has a UK source. Finance Act 2016 extended the definition of a royalty (to bring it in line with the OECD) and also provided that payments made by a non-resident in connection with a trade carried on through a UK permanent establishment (PE) have a UK source.
The proposals would both further extend the definition of UK source and also widen the types of payment within the scope (although only for cases caught by the new sourcing rules).
Specifically, a payment would have a UK source where it is paid (directly or indirectly) to a recipient in a territory that does not have a suitable tax treaty with the UK. This would apply regardless of whether the payer had a taxable presence in the UK. While the stated intention was to target payments to low or no tax jurisdictions, as currently drafted the proposal does not include a minimum tax or substance test, which could lead to some anomalous results.
While the types of royalty payment which would be subject to the new rules are one of the areas under consultation, the Government’s preferred approach is to use a broad generic definition. Regardless of whether a generic definition is used or if the types of payment are specifically defined, it is clear it would apply to many payments which would fall outside the current OECD definition of a royalty. In this respect the consultation makes specific reference to payments for the right to distribute specified goods or provide specified services in the UK.
From discussions with officials we understand that the principal target of this measure is the payment of a royalty to a low or no tax jurisdiction. Thus while the diagram in the consultation depicts a non-UK company with no UK taxable presence making such a payment, the rules could apply even where there is a significant UK presence. In an extreme case, it would appear the rules may apply even where that presence extends to sales made through a UK distributor. Accordingly, all groups that make sales to the UK and also pay royalties as described should pay close attention to the consultation.
Substantial reporting obligations would be incorporated as part of the rules, building on the existing framework of quarterly CT61s and the disclosures attached to the corporate tax return. These will be modified to address situations where the group has no UK taxable presence or where the taxable presence relates to another group entity. Joint and several liability - supported, where necessary, by existing international agreements - would underpin collection. Currently, there is no de minimis threshold for the provision and we would hope this is incorporated when draft legislation is published as part of next year’s Finance Bill.
Groups holding IP in jurisdictions that do not have a suitable treaty jurisdiction should review their position and consider submitting responses to the consultation ahead of the deadline of 23 February 2018.
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