INTM620510 - Offshore Receipts in respect of Intangible Property (ORIP): General: Anti-avoidance

ITTOIA05/Ch2A/S608W

Section 608W contains a targeted anti-avoidance rule (“the TAAR”) to counteract arrangements which aim to circumvent the provisions of Chapter 2A that govern the charge to tax on offshore receipts in respect of intangible property.

Section 608W applies to arrangements entered into on or after 29 October 2018. It will apply where a person has entered into any arrangements where the main purpose, or one of the main purposes, is to obtain a tax advantage for the person.

The tax advantage has to be wholly or partly due to either:

• S608W(1)(a) - A charge not arising under section 608A, or
• S608W(1)(b) - The provisions of any double taxation arrangement having effect where the tax advantage is contrary to the object and purpose of the provisions in the relevant treaty.

S608W(1)(a) may apply to a broad range of arrangements including where there are changes in the timings of intangible property payments or transfers of IP (see examples 1, 2 & 3 below). S608W(1)(b) may apply where there are double taxation arrangements involved (and its application is discussed further in example 4). S608W(1)(a) and (1)(b) are different tests and either or both may apply.

Whether an arrangement has a main purpose of obtaining a tax advantage is a question of fact which depends on several factors, including, for example, the circumstances of the particular case and the subjective intentions of the taxpayer.

Counteraction

Where s608W(1) applies, s608W(2) provides that any tax advantage can be counteracted by just and reasonable adjustments. S608W(3) sets out that such adjustments can be made via an assessment, a modified assessment, amendment or disallowance of a claim, or in any other way, as appropriate.

In cases where s608W applies, the extent of the appropriate counteraction must be considered. Any counteraction made under s608W will take into account the specific facts and circumstances in point, alongside the statutory purpose of the legislation. Although HMRC would normally expect the counteraction to be in proportion to the amount of the tax advantage, it follows that a just and reasonable counteraction under s608W may not always correspond exactly to the full amount of income tax that would have been payable but for the arrangement.

Example 1

A multinational group has an IP holding company within the scope of the provisions of Chapter 2A. If the group were to accelerate payments made to the IP holding company in respect of intangible property so that such amounts were received prior to the commencement date of 6 April 2019, with a main purpose of avoiding the new tax charge under s608A, s608W will apply. The tax advantage would be counteracted on a just and reasonable basis. Depending on the circumstances of the case, one possible counteraction could be to treat the payments as being made on the date that they would have been due absent the arrangements.

Application of the TAAR to transfers of IP

One of the primary aims of the Chapter 2A provisions is to discourage multinational businesses from holding intangible property in low tax territories distinct from the territories in which the substantive economic activities that relate to its development, enhancement, maintenance, protection and exploitation are located, and where little or no tax is paid on the income received. HMRC recognises that the interpretation and application of the TAAR should take into account the policy objectives and wider statutory purpose of Chapter 2A.

In general, and subject to the facts and circumstances in any particular case, it is unlikely that HMRC will make a counteraction under s608W where:

• There has been an outright transfer of all of the transferor’s rights in, and to, the relevant intangible property to the UK, a full treaty territory or to a “listed territory” (i.e. a territory specified in regulations made under s608JA); and
• The transferee undertakes substantive economic activity relevant to the IP rights in its territory of residence using real assets, controlling economically significant risks, and conducting that activity through its own personnel located in that territory.

This is on the assumption that such an outright transfer can be demonstrated to be in line with the statutory purpose described above, and that there are no contra-indications.

HMRC recognises that the activities associated with the development, enhancement, maintenance, protection and exploitation of IP will typically be carried out by groups in more than one territory.

HMRC would expect that taxpayers can demonstrate how the transfer helps to support the greater alignment of IP and underlying economic activities within the group and can provide a commercial justification for locating IP in the territory to which it has been transferred, over the other territories in which IP-related activities might be undertaken.

UK versus non-UK transfers

The application of the TAAR to transfers of IP to full treaty territories will take account of the object and purpose of the relevant double tax treaties, including that treaty benefits can be denied where a main purpose for entering into transactions or arrangements is to secure a more favourable tax position which would be contrary to the object and purpose of the relevant treaty provisions.

HMRC does not however expect the application of double tax treaties to make satisfaction of the TAAR a lower hurdle for transfers of IP to full treaty territories than transfers to the UK.

It is considered that the matter of whether there is a sufficiently strong connection between the IP and the activities undertaken in the territory of the transferee is a key question in determining whether the TAAR may apply on a transfer of IP; and this overlaps with the tests used in determining whether treaty benefits are consistent with the object and purpose of a treaty.

HMRC’s view is that, in considering the application of the TAAR and the wider statutory purpose in relation to a transfer of IP rights, the same principles and outcomes would normally apply for a transfer to a person resident in a full treaty territory as would normally apply to a transfer to a UK resident person.

Example 2

A multinational company (the transferor) within the scope of the provisions of Chapter 2A makes an outright disposal of IP to an affiliated company (the transferee) resident in a “listed territory”, the UK, or a country with which the UK has a full tax treaty. The transferor retains no rights in, or to, the transferred IP. The IP was previously separated from the underlying economic activity, but the transfer locates the IP with relevant substantive economic activity. The transferee has substantive economic activity relevant to the IP rights in its territory of residence that reflects this, using real assets and controlling economically significant risks and conducting activity through its own staff located in that territory. The income arising in respect of the IP forms part of the transferee’s taxable profits. HMRC’s initial expectation in such a case would be, subject to specific facts and intentions of the persons involved in any particular case, that the main purpose in transferring the IP may not have been to obtain a tax advantage (by avoiding a charge under s608A). However even if, on the facts, the company did have a main purpose of obtaining a tax advantage, HMRC would then consider the appropriate level of counteraction taking into account the specific circumstances of the case. It is possible that, in an appropriate case, it may be just and reasonable for there to be no or minimal counteraction of any tax advantage either on the transferor and/or the transferee.

Conversely, and although it would be dependent on the facts and circumstances of each case, HMRC considers the following to be a non-exhaustive list of factors that may indicate that s608W would apply on an outright disposal of IP. In such cases HMRC would likely look to counteract (on a just and reasonable basis) any tax advantage:

• The consideration for the sale of the IP does not reflect the amount that would have been agreed between independent parties acting at arm’s length, or there are other non-arm’s length arrangements such as royalty-free licences.
• The transferee is not resident in a full treaty territory, the UK or a “listed territory”,
• The transferee does not have substantial economic operations in its territory of residence and in particular relevant substantive economic activity relating to the IP that has been transferred.
• There are arrangements surrounding the transfer of the IP that lead to economically equivalent circumstances where, by whatever means, the income deriving from the IP continues to arise in a no or low tax territory. That is to say that the transferor (or a connected person to the transferor, other than the transferee) should not receive or be entitled to amounts which derive directly or indirectly from the transferred rights, including amounts such as financing or other returns in connection with any consideration for (or other sums or assets in respect of) the transfer.
• The transferee is exempt from or is not charged to tax on income in its territory of residence (and in any other relevant full-treaty territory, “listed territory”, or the UK in which the relevant activity is carried on) in respect of UK-derived amounts in respect of the transferred IP.
• There are any other arrangements involving a tax advantage within s608W.

Where there is counteraction of a transfer, it is expected that any counteracting adjustments would be made on either the transferor and/or transferee, depending on the facts and circumstances.

Example 3

A multinational company (the transferor) within the scope of the provisions of Chapter 2A makes an outright disposal of IP to an affiliated company (the transferee) resident in a “listed territory”, the UK, or a country with which the UK has a full tax treaty. The transferor retains no rights in, or to, the transferred IP. The transferee does not have any substantial operations in its territory of residence and in particular the relevant substantive economic activity in respect of the IP is undertaken elsewhere. If, on the facts, the company did have a main purpose of obtaining a tax advantage, HMRC’s initial expectation would be, subject to the specific facts and intentions of the persons involved in the case, that there would be full counteraction of any tax advantage on either the transferor and/or transferee.

S608W(1)(b)

Where s608W(1)(b) applies, the legislation will apply notwithstanding the UK’s obligations under a DTA where the tax advantage obtained is not in line with the object and purpose of the relevant provisions of that DTA. Section 608W(4) provides that a counteraction can be made in relation to an arrangement involving a tax treaty notwithstanding the general provision in relation to tax treaties that they “have effect…despite anything in any enactment” by virtue of section 6 Taxation (International and other Provisions) Act 2010 (TIOPA10).

The rule in s608W(1)(b) is closely modelled on the OECD tax treaty anti-abuse rule (principal purpose test or PPT). The rule is part of the OECD model tax convention and is supported by the OECD commentary. This commentary helps to explain how the rule will operate and how it is to be interpreted. HMRC will follow the commentary in the application of s608W(1)(b) appropriately, taking into account the fact that the OECD rule covers treaty abuse of all types, whereas the rule in s608W(1)(b) is a targeted anti-avoidance provision in relation to Chapter 2A.

Example 4

A company resident in a treaty territory but which falls within the scope of the provisions of Chapter 2A (for example, because it is not a full-treaty territory or it has a territorial basis of taxation) is a party to arrangements, where a main purpose of the arrangements is to obtain a tax advantage by obtaining treaty relief under s6 TIOPA10 from a charge on its UK-derived amounts, in circumstances where the relief is contrary to the purpose of the treaty. For example, this may be where, following signed changes to the treaty that are not yet effective, the company enters into arrangements to accelerate the payment of royalties that are then relieved in full, but which would have been eligible to only limited treaty relief if they had been paid on the scheduled payment date. S608W(1)(b) would apply in such circumstances. HMRC’s initial expectation in such a case would be, subject to the specific facts and intentions of the persons involved in any particular case, that there would be full counteraction of any tax advantage on either the transferor and/or transferee.