Liechtenstein introduced a tax reform at the beginning of this year which included changes to their taxation of intellectual property, giving a local effective tax rate of 2.5%. Those changes have now been ratified by EFTA’s Surveillance Authority.
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).
Not an esoteric offering for lunch, but the tax structure used by Google et al that’s been the subject of comment and some disapproval in certain quarters. So what is it all about? Read on below …
First, some notes:
- I haven’t advised Google or any of the other companies that have been reported as using this structure, so I’m discussing this in general tems;
- this isn’t a new structure, it’s been around for years – but it’s recently hit the business headlines, so I thought I’d explain it here; and
- this structure only works for US-headquartered groups – it relies on some quirks of US tax law. It’s not something that a UK headquartered company could use to any real effect.
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.
It looks as though Asda and Wal*Mart have succeeded in getting HMRC and the IRS both to recognise a transfer pricing adjustment on royalties – as it’s a settlement, there isn’t a lot of information about, so it isn’t wholly clear whether this was the result of direct negotiation or through invoking the mutual agreement procedures. Either way, Asda has to pay another £115m in tax, whilst Wal*Mart will get a corresponding deduction.
Following the report on the functioning of the Interest & Royalties Directive over a year ago, the EU has now launched a consultation on the Directive, looking to clarify existing legislation on taxation of cross-border royalties (and interest) between associated companies and extending benefits of that legislation to a wider range of companies.
The Indian tax authorities aren’t having a great success rate on IP and tax at the moment: earlier this month the Delhi High Court set aside a claim by the Indian tax authorities to disallow (on transfer pricing grounds) a royalty paid by Suzuki India to its parent company, the Suzuki Motor Corporation in Japan. The royalty was paid for the use of the Suzuki ‘S’ logo on cars sold in India, and the tax authority took the view that in an arm’s length transaction between unconnected parties, no royalty would have been paid. This seems somewhat unlikely, and the High Court reached the same conclusion.
The Maltese Government approved a number of changes to their tax laws on 16th April 2010 – of particular interest on IP is the news that, with immediate effect, royalty and similar income derived from qualifying patents in respect of inventions will be exempt from Malta income tax (subject to conditions still to be announced, including a cap on the maximum amount that may be exempted – and the EU may well have some comments on the matter).
The Chinese tax authority (State Administration of Taxation) issued supplemental guidance on the application of the royalties article in China’s tax treaties and the types of payments that will be considered royalties; this guidance is in Circular 46, and is supplemental to Circular 507 issued in September last year.