Government consults on extension of royalty withholding tax

The government is consulting on draft legislation to extend the scope of royalty withholding tax by charging multinationals income tax on offshore receipts related to intangible property (ORIP) including brands and patents

The consultation focuses on rules to extend the types of income on which non-UK residents are liable to UK income tax, known as offshore receipts for intangible property (ORIP), set out in Finance Act 2019. The rules extend current withholding tax on royalties and are retrospective, effective from 6 April 2019.

The measure is targeted primarily at large multinationals resident in low tax jurisdictions which are liable for intangible property (such as brands, patents and copyrights) where those amounts relate to the sale of goods or services in the UK.

The main purpose of the legislation is to crack down on large multinationals which the government has identified as gaining an unfair competitive advantage by holding their intangible property in low tax offshore jurisdictions, to the detriment of businesses operating in UK markets. It also modifies the definition of UK sales and makes provisions to relieve double taxation, and introduces a £10m de minimis UK sales threshold.

The Treasury estimates that the measure will raise £475m in the first year of operation from 2020-21, while revenue is expected to hit £275m in 2021-22, dropping to less than £220m in subsequent tax years.

The statutory instrument, set to be passed into law this autumn, will extend the scope of the income tax charge to low tax jurisdictions in circumstances where the non-UK person is resident in a jurisdiction with which the UK has an appropriate double taxation agreement but where the provisions of the agreement mean that there is no tax relief available to the person.

It also extends the scope of the rules to capture distributors or resellers using the look through principle to identify who acquires and resells the goods or services.

To address issues of double taxation, the government plans to introduce an exemption for instances in which more than one tax charge under this measure applies to the same income in respect of related entities.

For example, a royalty might flow through multiple group companies from sub-licences of the same underlying intangible property. If these group companies are based in jurisdictions that the measure applies to, they might all be subject to a charge under the measure. This exemption means that where there are multiple charges on group companies from the same income flow, the tax is only charged once.

The draft secondary legislation makes changes to Income Tax (Trading and Other Income) Act 2005, Part 5, Chapter 2A (Offshore Receipts in respect of Intangible Property).

The legislation contains a power for the Treasury to make any amendments to Chapter 2A by regulations, although any amendments must be enacted before 31 December 2019.

The consultation closes for comment on 19 July 2019.

HMRC consultation Draft regulations: Offshore Receipts in respect of Intangible Property

Sara White

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