Tax Journal

The new income tax charge on offshore receipts in respect of intangibles

29 November 2018

Finance Bill 2019 includes provisions taxing a non-UK resident person that is also not resident in a full treaty jurisdiction on gross income from intangible property held in low-tax jurisdictions to the extent that it is referable to UK sales. The draft legislation will take effect from 6 April 2019, although anti-forestalling provisions and a TAAR will apply from 29 October 2018. It is, in the authors’ opinion, debateable whether there is a principled basis for imposing tax on gross income. There are also practical concerns as to how businesses can be expected to trace use of their product or services by third parties; and the TAAR should be clarified to clearly enable restructuring in a way which aligns ownership of the IP with a substantive business in a ‘good’ treaty jurisdiction.

Steve Edge and Dominic Robertson (Slaughter and May) consider the Finance Bill provisions that seek to extend the tax net.

While the UK’s new digital services tax hogged the limelight in the recent Budget, much less attention was paid to the fact that the proposed extension of withholding tax on royalties paid to tax havens (announced at the previous Budget) was converted into a direct income tax charge, recoverable from UK affiliates of the person exploiting the intangible property if not collected directly.

Is this really a withholding tax by another name?

This change to the royalty withholding tax regime was made after consultation but, apart from the mechanics of recovery, the end result is broadly the same as a withholding tax, so there are still some questions of principle and practicability to address.

First, withholding taxes are intrinsically bad when imposed on businesses – because they are taxes on gross income with no relief for costs (such as amortisation, funding costs etc.) or other expenses of earning the income. This is likely to mean that there is either double taxation, or one jurisdiction is picking up more than its fair share of the taxes on net income arising from the particular activity. Second, in the case of the UK, the rate of income tax is higher than the CT rate that would apply to business profits.

Despite the change here from a tax collected by withholding to a tax collected by assessment, neither of these objections has been dealt with.

So, in two respects, the proposals verge on being punitive – which would make sense if the ...

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