IFA Congress 2012 Boston
Subject 1: Enterprise Services
UK country report
Reporter: Angharad Miller
1
Summary: UK domestic law
on inbound services
Corporation tax:
Income tax:
PE required.
Similar to OECD
definition
No PE threshold.
“trading within
the UK”
2
Summary: UK domestic law
on outbound services
• No distinction between services trade and
other trades
– Branch exemption available
– Possible limitation on credit for overseas WHT
3
UK double tax treaties - summary
• All apply a PE threshold to ALL residents
of the other state for CT and IT
• Some contain a services PE
• A few permit WHT on payments for certain
services
4
UK definition of services
• No general definition
• Employment/self-employment
• Construction services
• By elimination – if royalties, not services
• Transfer pricing rules: useful in distinguishing
royalties from payments for services
5
Payment for use of IP or for
inbound services?
• Importance: if for IP, possibility of UK WHT (20%
under domestic law, positive lower rates in many
UK treaties)
• Know-how: includes manufacturing techniques,
technical knowledge, secret processes
• Making know-how available involves the
provision of technical services
• HMRC: “common sense approach” needed to
determine whether services have been provided
6
Mixed contracts –
services + payments for use of IP
• HMRC: no definition of intangibles: for TP
purposes,= property which is not tangible
but could be exploited for consideration
between independent parties.
• Cost allocations in a mixed contract:
OECD TP Guidelines followed
– Services element: cost based method
– Royalty element: turnover based method
7
Embedded intangibles
UK Co
Payment: recharge of salary
Foreign
group co
8
Inbound services – is there a
taxable source in the UK?
• No special rule for services
• Nexus generally: trading in the UK
• Threshold for taxation by the UK:
– Corporation tax: PE
– Income tax: none
9
Outbound services –
source of income
• Unilateral double tax credit: place of
performance determines the source.
• Provisions of any applicable treaty will
override
10
Outbound services: UK tax
• Overseas branch: branch exemption available to
UK companies
• Exemption not elected: beware limitation on
double tax relief credit for any foreign tax:
– Companies: tax credit limited to average rate of UK
CT on all income, per S42 TIOPA
– Other taxpayers: assume foreign income = highest
income slice
– Both: Apply tax rate to fees minus an amount of
expenses considered appropriate under UK law (S37
& S44 TIOPA)
11
Corporation tax – inbound
Is there a UK PE?
• UK domestic law – no services PE?
• Dependent agency PE and services:
– Brackett v Chater (1986)
– Jersey co, all business via single UK resident
consultant
– Service contracts concluded in Jersey
– Consultant = dependent agent
– “The real question is where do the operations
take place from which the profits arise”
12
Practical guidance on source of
income from services
• INTM 23000:
• “in dealing with operations other than the
sale of goods the place of contract is of
less importance. For example, where
consultancy or services are provided or
where construction work is performed in
the UK, the non-resident should be
regarded as trading here wherever
contracts are concluded”
13
UK WHT on payments for
inbound services
• Subcontractors in the construction industry
• Sportspersons and entertainers
14
Construction industry scheme
• If not registered under the scheme, WHT
at 30%, non-final
• Registered: either WHT at 20%, non-final
or gross payment permitted
• Gross payment: labour element of contract
<£1000 or HMRC tests passed:
– Construction business
– Minimum value for services
– UK tax compliant
15
Compliance and enforcement –
UK tax on inbound services
• Corporation tax: liability falls on UK PE
• Income tax: on UK branch or agency of
the non-resident
– No obvious branch? Use UK common law
agency concept
– Could be an employee working in the UK
• In practice, income tax difficult to enforce?
16
Services – UK treaties
• UK = net exporter of services
• General UK treaty policy: no, or limited,
source taxation of services income
• 16 treaties with services PE including
recent treaties with Saudi Arabia, Qatar
and Hong Kong
17
Service PEs and the UK
• Interpretation per OECD Commentary
• “same of connected project” requirement
in most service PE articles (notable
exception: India)
• Possible for UK to levy tax on services
performed outside UK
• UK based employees of foreign resident
providing services solely to that foreign
resident – no PE as not trading in UK
18
Construction PEs and services
• Strong services element inherent in
construction projects
• 34 UK treaties provide that supervisory
activities may cause a give rise PE
• Question: which takes precedence:
services PE provision or construction PE
provision?
19
Allocation of profits to a
services PE in UK treaties
• Usual Article 7 principles apply
– OECD principles
– May deduct both direct and indirect expenses
• A few treaties contain explicit provisions
on profit allocation
20
Withholding tax on services in
royalty article in UK treaties
Argentina 10%
“rendering of technical
assistance”. Some deductions
Australia 5%
Services ancillary and
subsidiary to enjoyment of IP
Fiji
15%
Some deductions permitted
India
10/15% Various circumstances
Malta
10%
Similar to Australia
21
WHT – separate article
Country
Botswana
China (1984)
WHT
rate
Election for taxation on net basis?
7.5% No
7% No (NB no WHT in 2011 treaty)
Gambia
15% Yes but WHT payable on gross in the first instance
Ghana
10% yes
Guyana
10% No but rate can be reduced by agreement
Ivory Coast
10% yes
Kenya
12.5% Yes. Expenses not to exceed 75% of the gross fees
Lesotho
10% yes
Malaysia
8% no
Pakistan
10% yes
Trinidad and
Tobago
10% no
Uganda
15% yes
22
Withholding taxes on payments
for services in UK treaties
• Provision within the royalties article
• Separate article
• Simple gross basis
• Entitlement to deduct some expenses
• Option for net basis on furnishing a tax
return
23
Independent personal services
• Many existing UK treaties contain Art 14
equivalent
• Art 14 provisions can apply to partnerships
• Fixed base considered equivalent to PE
• 39 treaties contain UN-style Art 14: fixed
base if minimum days of presence
breached
24
Conclusions 1
• Domestic law:
uncertainty re UK
income tax for some
inbound service
providers resident in
non-treaty countries
• How often do we use
these rules?
25
Conclusions 2
• The UK does not have an explicit code for
the taxation of cross-border services (as
opposed to trade in goods) in domestic
law
• Treaty provisions vary considerably
26
UK exports goods and services
2008-2011
700 000
600 000
500 000
£ million
400 000
exports services
exportsgoods
300 000
200 000
100 000
0
2008
2009
2010
27
UK imports of goods and
services 2008-2011
700 000
600 000
500 000
£millions
400 000
imports services
imports goods
300 000
200 000
100 000
0
2008
2009
2010
28
Conclusions 3
• Domestic law treatment of services income:
– Corporation tax
– Income tax
5/10
1/10
• UK treaties – treatment of services income:
– No better, no worse than most other developed
economies, but treaties predicated largely on trade in
goods
• Overall, UK policy and practice reflects the
openness of the UK economy.
29
Questions &
comments?
30