The UK’s proposed digital services tax is not the only new tax measure that is targeted at the modern digital economy. A second change focuses on businesses operating in the UK market that utilise valuable international brands. Corporate income tax principles allow these business to deduct payments made for the use of these brands so long as these payments are priced on an arm’s length basis.
From April 2019, payments made for the use of intellectual property will be subject to income tax at 20% to the extent that the use of the IP is attributable to the sale of goods or services in the UK – although how easy it will be to trace this is not clear. The charge will only apply, however, if the ultimate recipient of the payment is in a tax haven. Like the proposed DST, this is tax on gross revenues, rather than profits and the rate is significantly higher than the proposed DST (2%) and even than the UK corporation tax rate (which is paid on profits, not gross revenues).
Whilst it might be argued that this is a fee for accessing the UK market, this does not stack up, given that it only applies to recipients located in tax havens and is imposed at such a high rate. The justification for this tax must be that it is intended to change behaviour – it is ok to make these payments to non-residents, but only if they are located in a "good" taxing jurisdiction. Or, to put it another way, if no one else is going to tax these receipts, then the UK will.
If the justification for the tax is that no one else is taxing the receipts, then it is difficult to see why there is not an exemption if the income is subject to tax at the parent company level. For example, if a royalty payment is made by a UK subsidiary of a US group to another group company located in a tax haven, should it not also be relevant whether the US taxes that receipt under the new US GILTI regime – which taxes certain income of non-US subsidiaries of a US group?
It is likely that this new tax will require many businesses to restructure. If this is the intent of the legislation, then it needs to be clear that relevant IP can be moved to a "good" taxing jurisdiction without falling foul of the rules.
It is, in the authors’ opinion, debateable whether there is a principled basis for imposing tax on gross income.