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IFA Congress 2012 Boston

Subject 1: Enterprise Services

UK country report

Reporter: Angharad Miller

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Summary: UK domestic lawon inbound services

Corporation tax:

PE required.Similar to OECD

definition

Income tax:

No PE threshold.“trading within

the UK”

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• No distinction between services trade and other trades

– Branch exemption available

– Possible limitation on credit for overseas WHT

Summary: UK domestic lawon outbound services

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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

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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

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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

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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

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Embedded intangibles

UK Co

Foreign group coPayment: recharge of salary

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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

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Outbound services – source of income

• Unilateral double tax credit: place of performance determines the source.

• Provisions of any applicable treaty will override

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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)

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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”

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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”

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UK WHT on payments for inbound services

• Subcontractors in the construction industry

• Sportspersons and entertainers

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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

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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?

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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

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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

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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?

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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

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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

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WHT – separate articleCountry WHT

rateElection for taxation on net basis?

Botswana 7.5% No

China (1984) 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

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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

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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

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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?

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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

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2008 2009 2010

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exports services

exportsgoods

UK exports goods and services 2008-2011

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0

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2008 2009 2010

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imports services

imports goods

UK imports of goods and services 2008-2011

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Conclusions 3

• Domestic law treatment of services income: – Corporation tax 5/10– Income tax 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.

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Questions & comments?