Long way to go for UK Chancellor’s IP tax plans, say lawyers
UK Chancellor Philip Hammond has set out plans to prevent companies from gaining an unfair advantage by locating IP in low or “no tax” jurisdictions, but lawyers have suggested the proposals will be difficult to implement.
In his Autumn Budget, released yesterday, November 22, Hammond announced plans by the government to increase the tax it collects from firms doing business online.
The “Corporate tax and the digital economy” section of the Budget statement explained that under current rules, the UK only taxes royalties if they are paid by a company with a UK presence.
It does not tax royalties paid by foreign companies without a physical UK presence. These include those which generate revenue from the UK while basing themselves in another country.
The Budget statement said that under new rules, payments would be due “even if the group has no taxable UK presence under current rules”.
It added: “It will prevent multinationals from gaining an unfair advantage by locating an IP in low or no tax jurisdictions and so will level the playing field.”
Stephen Hodsdon, partner at Mewburn Ellis, explained that the 2016 Budget and Finance Bill expanded the tax on IP royalties to encompass a deduction of income tax at source for a wide range of revenues, in particular trademarks and brand names.
“This measure was squarely aimed at multinational companies who used intra-group IP licensing to transfer income from their UK operations to countries with lower levels of (or no) corporate taxation.”
He added: “The 2017 budget seeks to address a similar position in relation to primarily digital businesses with no UK presence. The proposed change is that any royalty payment made in connection with UK sales will be taxable, even if the group has no taxable UK presence under current rules.”
The taxes are set to be implemented in April 2019 and are expected to raise over £800 million ($1.1 billion) by 2023.
Hodsdon continued: “Whilst the government’s intention to account for the ‘value’ that UK users are contributing to these companies appears laudable, implementation appears potentially tricky.
“The government has admitted that it is still unclear how this tax will be enforced, particularly where companies have no taxable UK presence.”
Sara Luder, tax partner at Slaughter and May, explained that the changes highlight that technology companies seem to have overtaken banks “as the preferred source of vote-winning”.
“The new rules extend the IP royalty withholding tax rules enacted in 2016 to cover situations where a UK distributor buys and sells products on its own account (rather than just where it buys and sells via commissionaire or sales support structures),” she explained.
“These measures may not in fact raise much revenue in the medium term, given that ‘double Irish’ IP structures will need to be closed down in 2020. But it is a further move towards taxing profits in the UK merely because the end-user sale is in the UK, which is not a general feature of the international tax system.”
Vanessa Marsland, partner at Clifford Chance, said there is a long way to go for the plans to be implemented.
“As with many of these things, the devil is in the detail. Taxation of this kind is part of an international issue and it will be difficult to implement.
“Big multinationals have tax teams and are used to changes, however it can be very expensive to implement as changes in one jurisdiction often have a knock-on effect with others.”
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