The ECJ decision on the WebMindLicenses case (published 17 Dec 2015) provides guidance on points to consider when determining whether a licensing agreement amounts to VAT ‘abuse’ (and, accordingly, points to watch to make sure a licensing agreement is not abusive!)
The recent case of Iliffe News and Media Ltd & others v HMRC  UKFTT 696 (TC) illustrates firstly the risks of IP tax structures – get the IP law right!
The case was actually lost because the companies involved tried to transfer unregistered trademarks without also transferring the business to which they related – and you can’t do that under English law.
The Tribunal didn’t leave the judgement there; instead, they went on to look at the consequences if the taxpayer hadn’t actually got the law wrong.
Taxand have published an article – Payments For Leasing Bandwidth: Business Profit Or Royalties? – following a recent case in Indonesia. The case involved a payment from Indonesia to a UK company (Intelstat) for the use of satellite bandwidth, and quotes similar cases in India and Australia. The court found for the taxpayer, that the lease payments were business profits and not a payment of royalties.
The point at issue was the interpretation of the phrase “the use of, or the right to use, industrial, commercial or scientific equipment” in the UK/Indonesian tax treaty. This phrase appears in the royalties article of a number of older UK tax treaties and seems at odds with the more usually encountered definition of royalties in this context as relating to the direct use of intellectual property, rather than to the use of the product of intellectual property (the equipment).
Just when you thought it couldn’t get more confusing … Following on from the post on the Microsoft case, I came across a Advance Ruling given to GeoQuest Systems BV (a Dutch company) by the Indian authorities in August.
Remember that the Delhi Tax Appeal Tribunal pretty much held that all software payments are royalties, and withholding tax needs to be deducted from payments, even if for shrink-wrap boxed software? Well, the GeoQuest Advance Ruling concludes that a payment for the licensing of special purpose software does not constitute a royalty – so no withholding tax on payments made from India.
The sound you hear is my head hitting the desk in confusion.
The Advance Ruling concludes that a payment for a software license does not fall within the parameters of a “royalty,” being a payment of any kind made for the use of, or the right to use, a copyright of a literary or scientific work.
Could the department dealing with Advance Rulings tell the Tax Appeal Tribunal that, please?
In an early start to the pantomime season, the earlier sensible decision on shrink-wrap software of the Bangalore Tax Appeal Tribunal appears to have been thoroughly ignored by the Delhi Tax Appeal Tribunal, which has held that payments received by Microsoft from end users in India through distributors for sale of Microsoft off-the-shelf, shrink-wrap, software, are taxable as royalties (and so are subject to Indian withholding taxes). In effect, the decision means that any sale of software to India should have tax withheld from the payment, no matter what form the software actually takes – that’s going to make quite a difference to some profit margins.
Oh, and tax treaties with India can’t apparently be relied on, according to the court.
XX v HMRC (and related appeals) (TC00689, released 17/9/10 but has taken some time to surface on the tribunal site) – the decision was anonymised, presumably because of the defence connection:
The First Tier Tribunal has upheld a claim by an inventor (XX) that the licence fees paid to him by a company of which he was a director were trading income, and not employment income – saving National Insurance Contributions for the company at the very least.
Kronospan Mielec sp zoo v Dyrektor Izby Skarbowej w Rzeszowie (Case C-222/09): the ECJ confirmed that where R&D services carried out by engineers are supplied ‘on a contract basis for the benefit of a recipient established in another Member State’, they were ‘services of engineers’ and so the place of supply is the country in which their work is carried out, not the country from which they are supplied.
EMI Group plc v HMRC (ECJ Case C-581/08) – EMI were seeking clarification of whether they needed to account for VAT on sample CDs provided to promoters and media businesses; the particular question was over the VAT treatment that applied when they provided several CDs to one promoter. UK VAT law allows only the first sample given to someone to be VAT-free (as a supply not for consideration) so that, where several CDs were provided to a promoter for that promoter to pass on to contacts, HMRC wanted EMI to account for VAT on all except the first CD. The matter arrived at the Commissioners in 2004, who referred the question of what constitutes a sample to the ECJ.
In Velankani Mauritius vs. DDIT (ITAT Bangalore) the company supplied shrink-wrap licensed software to Infosys Technologies in India. The Indian tax authorities assessed the profits from the transaction as taxable royalties, rather than business profits which would not be subject to tax as Velankani did not have an Indian permanent establishment. The tax authority’s view was first confirmed by the tax court but has now been overruled on appeal; the appeal court held that the profits from the sale of shrink-wrap licensed software are not royalties.