As promised in the Autumn Budget, the Government has published its consultation document on royalties withholding taxes (the “Consultation”) (access here). The Consultation assesses how the concept of withholding tax may be applied to tackle intra-group arrangements aimed at reducing tax to artificially low levels, and how to hold digital businesses accountable to tax.
The withholding tax will apply from April 2019 where there is ‘exploitation in the UK’ to royalty payments and any payments for the use or exploitation of rights over intellectual property and intangible assets. In scope are payments between connected parties, regardless of whether they have a permanent establishment or any taxable presence in the UK.
The new rules will not apply to payments made to a country with which the UK has a double taxation agreement that includes a non-discrimination article, except where the purpose of the payments is to obtain a tax advantage contrary to the objectives of the double taxation agreement. Importantly, if the jurisdiction from where the payment is made also withholds tax this could lead to an inequitable situation whereby there is no relief under double taxation treaties.
In relation to payments made to countries with which the UK does not have double taxation agreements including a non-discrimination article, or there is no double taxation agreement at all, the measure will apply.
In the Consultation, the Government proposes joint and several liability for any group member. The result of this is that the Government will be able to collect tax revenues from any related party in the UK where a non-resident company has failed to meet its obligations under the legislation. If the group does not have a UK presence, the Consultation explains that HMRC will rely on the UK’s international agreements to hold the taxpayer or another company in its group accountable for the amounts owed.
Responses to the consultation should be emailed to firstname.lastname@example.org or by post to Royalties WHT Consultation, Room 3C/21, HMRC, 100 Parliament Street, London SW1A 2BQ by 23 February 2018.
For information in respect of the EU developments in this area please see our articles Europe Taxing the Digital Economy: could a turnover tax be on the horizon? (here) and Public Input on Taxing the Digital Economy (here). For analysis on the initial measures announced in the Autumn Budget please see our blog post Taxing the Digital Economy: First Steps by the UK (here).