INTM630250 - Royalty Withholding: Anti Treaty Shopping Rules: Calculating the amount of withholding tax

S917A(2) ITA 2007 requires the payer of an intellectual property royalty payment to deduct from the payment a sum representing income tax under Chapter 6 or 7 ITA 2007 if the relevant conditions are met. In most cases, the sum to be deducted will be calculated by reference to the amount of the royalty payment made.

For example, if a royalty payment of £100m is made and there is a duty to deduct income tax is at basic rate (currently 20%), the amount deducted is £20m.

Conduit jurisdictions

Some jurisdictions have DTAs with the UK and other states that make them more likely to be used as conduits through which payments from the UK are routed to pass through to beneficial owners in low or no tax jurisdictions to secure a tax advantage. The tax system in the conduit jurisdiction may also make it an attractive choice.

When a royalty payment is made through a conduit jurisdiction, it does not matter for the purposes of the rule whether an element of the payment is retained in the conduit jurisdiction. ITA/S917A will deny treaty benefits on the full amount of the royalty payment.

For example, a royalty payment of £100m is made. Of this, only £80m is passed to a subsequent jurisdiction meaning £20m is retained within the conduit jurisdiction. Treaty benefits will be denied on the whole £100m royalty payment, resulting in an income tax liability of £20m.