On 1 December 2017, HMRC published 'Royalties Withholding Tax - consultation'. It proposes extending the rules imposing withholding tax (WHT) on royalty payments made to non-UK residents.
The purpose of the consultation is to assist in design of new rules to be introduced in Finance Bill 2018-19 to be effective from 6 April 2019.
Existing rules
Tax must be withheld at 20% on UK source royalty payments made to non-UK residents. However, two EU Directives restrict the scope of this:
- The Interest and Royalties Directive: payments of interest / royalties between EU companies are free of withholding tax provided one holds 25% of the other, or a third company directly holds 25% of both.
- The Parent / Subsidiary Directive: no withholding tax applies to dividends between EU companies provided the parent has at least a 10% interest.
In addition, a number of Double Tax Treaties (DTT) restrict the rate at which tax can be withheld.
The term “UK Source” is not defined, but a payment will always have a UK source where
- The payer is a non-UK resident carrying on a business in the UK through a PE in the UK; and
- The payments (or part of them) are made in connection with the trade of the non-resident carried on through its PE in the UK.
Royalties paid are reported to HMRC on form CT61 (quarterly) if tax was withheld or CT600H (annually) if no tax was withheld.
Proposal overview
The aim is to extend the circumstances in which WHT can be applied to circumstances where payments are made between connected parties for exploitation of IP (or certain other rights) in the UK.
The new rules will also not require the payer to have a UK presence.
However, the new rules will only apply where the payee is resident in a jurisdiction with which the UK does not have a DTT including a non-discrimination article (NDA).
As pursuing tax internationally is difficult and costly, the measures would make a group jointly and severally liable for any tax due.
Specific Queries
Scope:
What payments should be caught? The government sees two options for this
- (HMRC preferred) Generic approach. This would be broad in scope; the government believes agreements for the use of IP are generally explicit in their description of such rights so this approach will provide certainty of treatment.
- Specify types of payment.
4.1 If a more targeted approach is preferred, how should the types of payment within scope best be described?
4.2 Do you agree that a generic approach will provide greater certainty in the application of this measure? If not, what do you see as the likely areas of difficulty arising from this approach.
4.3 Do you agree that the primary scope of the rules should be payments between related parties? Are there any circumstances in which the rules should apply to payments between unrelated parties?
Calculation:
In order to avoid double taxation, credit will be given for WHT suffered on amounts received under a sub-licence when paying WHT to HMRC on royalties paid so long as the two agreements are essentially identical.
Where the licence covers a wider geographic area than the UK, the royalties must be apportioned on a just and reasonable basis.
Where other legislation also taxes the payments, only the highest liability will apply.
4.4 Do you agree that such an approach is appropriate in determining the amount of any payment that has a liability to IT? In your experience, what are the most common approaches taken to determine the amounts payable under these and similar arrangements?
Recipients:
4.5 Do you agree with the government’s preferred approach of a liability arising only when payment is made to a jurisdiction with whom the UK’s DTT does not contain an NDA, or where there is no DTT in place?
4.6 Given the types of payment likely to be made, to what extent would the rules impact on payments made to jurisdictions that are not low or no tax regimes?
Reporting:
5.7 Do you agree that the existing CT61 and CT600H, as adapted, are an appropriate way to return a liability under the proposed measure?
5.8 Do you agree that provision of a return of specific information to an Officer of HMRC is a proportionate way of collecting information from way of collecting information from groups?
5.9 Are there any other administrative easements that would reduce the compliance burden on groups, whilst ensuring provision of appropriate information?
Payment:
5.10 Do you believe that creation of joint and several liability is an appropriate way to enable debt collection in the case of non-compliance?
Double taxation:
6.11 Are there circumstances in which the proposed measure will give rise to inequitable double taxation?
Assessment of impacts:
7.12 Do you have any comments on the assessment of equality and the impact on business as a result of this change?
This consultation will close on 23 February 2018.
Links
Finance Act 2017: Tax Update and Rolling Planner
HMRC: Royalties Withholding Tax - consultation
Summary of Questions:
- If a more targeted approach is preferred, how should the types of payment within scope best be described?
- Do you agree that a generic approach will provide greater certainty in the application of this measure? If not, what do you see as the likely areas of difficulty arising from this approach.
- Do you agree that the primary scope of the rules should be payments between related parties? Are there any circumstances in which the rules should apply to payments between unrelated parties?
- Do you agree that such an approach is appropriate in determining the amount of any payment that has a liability to IT? In your experience, what are the most common approaches taken to determine the amounts payable under these and similar arrangements?
- Do you agree with the government’s preferred approach of a liability arising only when payment is made to a jurisdiction with whom the UK’s DTT does not contain an NDA, or where there is no DTT in place?
- Given the types of payment likely to be made, to what extent would the rules impact on payments made to jurisdictions that are not low or no tax regimes?
- Do you agree that the existing CT61 and CT600H, as adapted, are an appropriate way to return a liability under the proposed measure?
- Do you agree that provision of a return of specific information to an Officer of HMRC is a proportionate way of collecting information from way of collecting information from groups?
- Are there any other administrative easements that would reduce the compliance burden on groups, whilst ensuring provision of appropriate information?
- Do you believe that creation of joint and several liability is an appropriate way to enable debt collection in the case of non-compliance?
- Are there circumstances in which the proposed measure will give rise to inequitable double taxation?
- Do you have any comments on the assessment of equality and the impact on business as a result of this change?