Press Room

4 Jun 2020

Offshore receipts in respect of intangibles – bark worse than bite?

Since the OECD began its project to stop base erosion and profit shifting in 2013, the UK Government has introduced a number of measures to protect the UK’s tax base, including the Diverted Profits Tax, Corporate Interest Restriction and now the Offshore Receipts in Respect of Intangible Profits (or ORIP for short) rules.

Originally, the Government contented itself with beefing up the UK’s rules on withholding tax on royalties. However, it was then decided they had not gone far enough and widened the net to anyone who exploited intangible property (not just intellectual property) in order to generate UK sales, wherever they are based and no matter how many levels there are between the UK customer and the holder of the intangible property. The new rules also apply whether the exploitation led to an income receipt or a capital one. The rules are wide ranging and as the charge is to income tax, the rate is 20%. Further, as this is a withholding tax, it is on gross payments not profits.

The aim of the rules is to target multinationals that park their intangible property in low or no tax jurisdictions. The rules are extra-territorial because they only apply to companies that indirectly receive money from a UK customer.

Example – Gadget Plc

Gadget Plc, resident in Utopia, a country that has no corporation tax, owns the IP to the “wonder gadget”. Its subsidiary, Gadget Sales Ltd resident in Ruritania, a “normal tax rate” country, has a license to manufacture the “wonder gadget” which is sold to customers in the UK via local sales subsidiaries. Gadget Sales Ltd makes payments of £20mn to Gadget Plc in respect of those UK sales.

Gadget Plc has no direct sales or contacts with the UK, but the payments it is receiving are derived from UK sales and therefore within the rules. Gadget Plc will be chargeable to UK income tax at 20% upon those sales.

Tax Treaties

The rules do have an exemption for any recipient who is resident in a country with which the UK has a “full tax treaty”. For example, if Gadget Plc was resident in Ireland, the rules would not apply.

The definition of “full tax treaty” is one that contains a non-discrimination article that applies to “nationals”. You would think this would apply to all of the UK’s modern treaties, but no, there are some notable exceptions to this exemption. These include Hong Kong, Jersey, Guernsey and the Isle of Man, all of which have modern treaties that contain non-discrimination articles but do not refer to nationals as they do not have their own nationals. For example, “nationals” of Jersey and “nationals” of the UK are, in fact, both British Nationals. Therefore, the non-discrimination article in the Jersey/UK tax treaty cannot use the term “national” as no-one would know whether you were referring to Jersey or the UK.

However, all is not lost if the payment ends up in a company resident in one of these territories. This is because although the “full treaty” exemption within the ORIP rules does not apply, the normal treaty rules do. Therefore, the tax treaty will, as usual, take precedence over domestic legislation, including the ORIP rules. Using our example, if Utopia has a tax treaty based upon the Jersey tax treaty, the UK will only be able to tax Gadget Plc if either it has a taxable presence, known as a permanent establishment, in the UK, or it is receiving royalties from someone in the UK. As neither of these apply, it has no presence in the UK and the payments it receives are from a Ruritanian company, the UK cannot tax the payments it receives.

It is worth noting that companies resident in a full DTA territory will remain within ORIP if they are subject to tax there only on local source income or on a remittance basis.

It does seem therefore that for once, the bark is worse than the bite.

Zoe Wyatt

Zoe is a Partner at Andersen Tax in the United Kingdom. Specialising in international tax, she develops the blue-print solution to her clients’ cross-border needs.

Email: Zoe Wyatt