Royalties withholding tax – ICAEW response to the consultation

HMRC issued a consultation on 1 December 2017 to which ICAEW Tax Faculty responded on 23 February 2018, ICAEW Rep 26/18.

The consultation was aimed to counteract “a narrow range of arrangements that achieve low effective tax rates through holding intellectual property in low or no tax jurisdictions”. In particular it is proposed that “ royalty payments between related parties outside the UK will be brought within the scope of UK tax where the royalty is paid for the exploitation of Intellectual Property (IP) and that IP is exploited to make sales in the UK but in such a way that those sale do not, under current law, give rise to a Permanent Establishment (PE), or deemed PE, in the UK.”

We responded to the specific questions raised in the consultation but we also had some more general concerns about the feasibility of the proposals. Our general comments are reproduced below:

“We have serious concerns about the practicality of the proposed withholding tax and how it could be made to apply to non UK royalty payments by foreign entities that do not have a taxable presence in the UK.

We are also very concerned about the potential impact on some prominent and iconic UK business sectors which are major contributors to the UK economy and to the standing of the UK in the world.

The music industry is underpinned by royalty payments and a number of the most prominent music businesses have major set ups in the UK and the US and royalty payments flow between the two countries and between other countries in the world.

At the moment the UK and US Double Tax Agreement has a non discriminatory clause so royalty payments would not be caught under the current proposals which do not apply if such a clause is in place. However, there is genuine concern that if this condition was modified in the future then any royalty payments involving the US might be brought within the amended provisions.

We are also concerned that the very recent US tax reform provisions are going to have an impact on US based companies operating in the rest of the world. Any proposals need to be “tested” against the post US tax reform environment.”

BBC interview with the Financial Secretary to the Treasury, Mel Stride

Mel Stride talked about new ways to tax the digitalised economy in an interview with the BBC the day before this consultation closed. You can view the interview and read some background comments from the BBC on their website by clicking here.