Eloise Walker, a corporate tax expert at Pinsent Masons, the law firm behind Out-Law.com, said: "DST caught the headlines after the budget because it is likely to affect high profile companies like Facebook, Google and Amazon. However, the overseas intangibles tax will apply to a wider range of businesses and could therefore have a greater impact on multinationals operating in the UK," Eloise Walker said.
The new income tax charge on offshore receipts in respect of intangible property was announced in last month's budget and is due to apply from 6 April 2019. At the same time the UK chancellor announced that he would be introducing a new digital services tax (DST) applying to social media platforms, search engines and online marketplaces.
"Any non-UK owned business with intellectual property held in a low tax jurisdiction could be caught if it is making large sales in the UK through an offshore company or other structure. The measure is likely to affect a wide range of predominantly US-owned multinationals which have tended in the past to adopt the structures which will be caught by this new measure," she said.
A 20% income tax charge will apply to gross income realised by a non-UK resident entity with intangible property that is used to generate UK sales revenues. It will not apply to non-UK entities which operate through a UK permanent establishment.
'Intangible property' is widely defined and will include patents, knowhow, trademarks, distribution rights and even customer lists. The tax charge will apply only to the proportion of the non-UK resident entity’s intangible property income that is derived from UK sales. Like DST it will be charged on income, rather than profits.
It will only apply to non-UK entities if the total value of their UK sales and those of entities connected with them exceeds £10 million.
HMRC gives an example of a company located in a low tax country (IP Co) owning trademarks, know-how, distribution rights and customer lists. IP Co licenses this intangible property to Sales Co, a connected party, located in another country outside the UK. In turn, Sales Co uses this intangible property to manufacture and make direct sales of goods, such as laptop computers, to UK customers.
HMRC says that the fee paid by Sales Co to IP Co for the use of the intangibles would be potentially within the scope of the tax as it would be referable to the sale of goods to a UK customer.
The tax charge will apply to sales made to UK persons directly by the non-UK resident entity or through related parties. HMRC says the charge will also apply to the indirect, but substantial, exploitation of the intangible property in the UK market through unrelated parties.
The tax charge will only apply to entities located in jurisdictions with which the UK does not have a double tax treaty containing a non-discrimination provision. This will usually be low tax jurisdictions and will include Bermuda, the British Virgin Islands and the Cayman Islands. In order to ensure the measure only applies where intangibles are held in low tax jurisdictions, there is also an exemption form the charge where the local tax paid by the foreign entity in respect of UK-derived amounts is at least 50% of the UK income tax charge.
There is also an exemption for non-UK entities which have not acquired their intangible property from related parties and where all, or substantially all, the trading activities have always been undertaken in the low-tax jurisdiction.
The measure was first proposed and consulted upon at Autumn Budget 2017, although then it was proposed as a royalties withholding tax. Respondents to the consultation highlighted difficulties in structuring the tax as a withholding tax and particularly concerns about the likelihood of double taxation. The government has therefore decided to structure the tax as an income tax charge on the entity which holds the intangibles.
The government estimates that the offshore intangibles measure will raise more in its early years than DST - presumably because multinationals are expected to restructure. It forecasts that tax on offshore intangibles will raise £475m in 2020-21, falling to £275m in 2021-22 and £165m by 2023-24. In contrast it estimates that DST will raise £275m in 2021-22 but that the receipts will increase to £440m by 2023-24.
"This new charge is another example of the UK acting unilaterally. It is worrying that this major new tax change comes into force so soon. There has only been one broad consultation on the proposal and we have only just seen draft legislation. The legislation is very broadly drawn and HMRC guidance as to how the rules will apply will be crucial. Let's hope we get the guidance in enough time to enable businesses to work out how the rules affect them," Eloise Walker said.
The legislation will include anti-forestalling provisions from 29 October 2018 and a targeted anti-avoidance rule (TAAR), which will protect against arrangements designed to avoid the charge, for instance by transferring ownership of intangible property to another group entity resident in a full treaty jurisdiction.
The non-UK entity holding the intangibles will be primarily liable for the tax, but if that entity does not pay the tax, HMRC will be able to recover it from UK entities within the same group.