The UK ORIP (Offshore Receipts in respect of Intangible Property) Tax Regime

The UK ORIP (Offshore Receipts in respect of Intangible Property) tax regime

The ORIP regime came in to effect on 6 April 2019 with targeted anti-avoidance provisions that apply to arrangements made from 29 October 2018.

The stated policy aim of the legislation is to target multinational groups that generate significant income from intangible property (such as brands, patents and copyrights) through UK sales, and have made arrangements such that the income is received in offshore jurisdictions where it is taxed at no or low effective rates.

By taxing the proportion of that income which is referable to the sale of goods or services in the UK, the legislation reduces the opportunities for multinationals to gain an unfair competitive advantage by holding their intangible property in low tax offshore jurisdictions, levelling the playing field for businesses operating in UK markets.

The UK ORIP Rules

The rules are very wide-reaching and from the outset, there was widespread concern as to the breadth of the legislation and concerns over the clarity of some of the provisions, in particular the application of the anti-avoidance provisions. It was realised that the legislation would require correction and on 24 May 2019 draft amending regulations were released for comment. The deadline for comments was 19 July 2019.

Proposed amendments to the ORIP

Entities no longer protected from ORIP

• Under the current rules, there is an exemption from ORIP where a non-UK resident person is resident in a full treaty territory i.e. a jurisdiction with which the UK has a Double Taxation Agreement (DTA) with a non-discrimination article. The amendments extend the scope of the rules by including that a person will not be considered resident under the relevant DTA if the person is explicitly excluded from obtaining relief under the DTA. For example, Barbados is a full treaty territory but a Barbados International Business Company (IBC) is specifically excluded under the UK/Barbados DTA. For the purposes of these rules, it would not, therefore, be treated as a resident in Barbados.
• Under the current rules, a person is not considered a resident under the DTA if they are liable to tax only on income arising in that jurisdiction or capital held there. The draft seeks to extend this by also deeming persons to be non-resident if they are taxed on foreign source income and gains only when remitted to the jurisdiction unless the amounts are actually remitted there in the tax year; and

1. the amount of tax that is paid in the territory in respect of the UK-derived amounts is not determined under designer tax provisions, and
2. the company is not, at any time in the tax year, involved in an arrangement the main purpose, or one of the main purposes, of which is to obtain a tax advantage for itself or any other person.

Additional jurisdictions may be taken out of ORIP

The amendments introduce an exemption for companies resident in certain other specified jurisdictions. The jurisdictions will be specified in Regulations which may be changed by HMRC. The jurisdictions will be ones that do not pose a risk to the policy objectives of the legislation.

Proposed computational amendments

The ORIP charge is imposed on the person receiving “UK-derived amounts” i.e. the income or capital amounts received which are derived, directly or indirectly from UK sales. The draft guidance notes that UK-derived amounts is a broad concept, but the draft amendments contain some changes to the computation as set out below.

UK resellers excluded

The draft regulations modify the definition of UK sales to look through UK resellers so that a sale to a UK reseller will not be treated as a UK sale for the purposes of these rules. A reseller is defined as a person who acquires and resells goods or services without making changes or modifications to them (other than incidental changes).

Certain UK sales disregarded

The amended legislation provides an exception from the charge for UK sales made by third parties where the IP makes an insignificant contribution to those sales.

Elimination of double-counting

The draft regulations make provision to mitigate double taxation by introducing an exemption in circumstances where an ORIP charge arises to more than one company in a group in respect of the same underlying IP. The explanatory memorandum gives the example of a royalty that might flow through multiple group companies from sub-licences of the same underlying intangible property. If these group companies are based in jurisdictions that the measure applies to, they might all be subject to a charge under the measure. This exemption ensures that where there are multiples charges on group companies from the same income flow, the tax is only charged once.

Conclusion – where are we now?

We will await comment from HMRC based on any feedback they have received. However, it seems unlikely that any changes will really narrow the potential scope of the rules.

If you or your clients need any advice in relation to this or other matters please contact us.