11 12 2017

UK Releases Guidance On Royalties WHT Proposal

The UK Government has released a consultation on the royalty withholding tax targeting digital firms announced in the UK's most recent Budget.

Under the proposal, the Government intends to introduce legislation in Finance Bill 2018-19 to broaden the circumstances in which certain payments made to non-UK residents have a liability to income tax. These changes will have effect from April 2019, in what is said to be an expansion of the UK's arsenal to combat base erosion and profit shifting activities by multinational companies.

The consultation, which is intended to support the development of the legislation, notes that the Finance Act 2016 (FA16) included provisions to reinforce that all royalties arising from the UK will be subject to the deduction of income tax – a withholding tax – at source unless the UK has explicitly given up its taxing rights under an international agreement (such as a double tax avoidance agreement).

At Autumn Budget 2017, the Government announced a further extension to the FA16 rules. This measure will mean that payments for the exploitation of certain property or rights in the UK that are made to connected parties in low- or no-tax jurisdictions will be subject to "appropriate taxation."

The Government said in the consultation: "This is another step towards the Government's longer term ambition of domestic and international reform of the taxation of digital businesses. Whilst this measure will predominantly affect digital businesses, it may also affect groups operating in other sectors. It explained that the measure is proposed to be a targeted rule aimed at intra-group arrangements that achieve 'an artificially low effective rate that is distortive to competition in the markets in which they operate, including the UK.'"

The consultation is to intended to support the development of a withholding tax that delivers on these policy aims. The consultation is to close on February 23, 2018, and legislation is to be tabled in summer of 2018.