INTM620740 - Offshore Receipts in respect of Intangible Property (ORIP): Glossary of terms: Meaning of “UK-derived amount” and “UK sales”

ITTOIA05/Ch2A/S608F

“UK-derived amounts” S608F(1)

The charge to tax on offshore receipts in respect of intangible property is calculated on the “UK-derived amounts” arising in the tax year. This is the intangible property (IP) income that the person receives or is entitled to receive that ultimately derives, directly or indirectly, from UK sales.

“UK-derived amounts” are:

  • amounts arising in respect of the enjoyment or exercise of rights that comprise IP, and
  • the enjoyment or exercise of those rights (or rights derived from those rights) enable, facilitate or promote UK sales (directly or indirectly)

UK-derived amounts will include both capital and revenue amounts where the recipient of the amount has an interest of any description in the IP, including where the amount is in respect of past or future enjoyment or exercise of IP rights, such as payments made in advance or in arrears. The inclusion of capital amounts, as well as revenue amounts, in the definition of UK-derived amounts is to ensure the robustness of the legislation.

UK-derived amounts will include amounts from the enjoyment or exercise of intangible property (or rights over intangible property). These amounts may arise in the form of an income stream or as part of the costs/sales proceeds of goods, services or other property, for example where there is an embedded royalty.

Example 1

Fasterr is a global sports shoe brand headquartered in Spain. Fasterr PR, the group’s manufacturing and distribution principle based in Puerto Rico, is within the scope of Chapter 2A. UK sales are underpinned by the familiar brand and technology that purports to make the wearer run faster. There is intangible property within the definition at s608H which has facilitated, enabled or promoted UK sales. There are UK-derived amounts included in the return arising to Fasterr PR, and a charge under S608A will arise on the full UK-derived amount which relates to the sale of the trainers in the UK.

UK-derived amounts will relate to UK sales, but it does not matter whether the UK sales fall in the same tax year or a different one.

Examples of UK-derived amounts might include royalties; payments for the use of intellectual property (or other rights over intellectual property) such as registered and unregistered trademarks; distribution and manufacturing rights; other payments for the use of “know-how”; payments made under a franchise or licensing agreement; or payments relating to goodwill.

A UK-derived amount will still arise to a chargeable person, even in a situation where the enjoyment or exercise of the right (directly or indirectly) in relation to indirect UK sales is held or enjoyed by another non-UK person, where if the right held or enjoyed by that other non-UK person is derived (directly or indirectly) from the IP held by the chargeable person.

Example 2

Company A holds the non-US IP for the worldwide group. Company A is based in the Cayman Islands which is a territory in scope of Chapter 2A. Company B, resident in a territory outside the scope of Chapter 2A, has a sub-licence of the IP under which it makes payments to Company A which allows it to make sales in the UK. The amounts that Company A receives from Company B are within scope of the legislation.

UK-derived amounts will also include upfront or delayed premiums for licences, as well as termination, variation, surrender, waiver and commutation payments.

UK-derived amounts are not expected to include amounts received by the chargeable person for the outright disposal of the relevant IP.

In evaluating whether the amounts are in respect of an outright disposal, this will depend on the facts and circumstances of the transaction, including the substance and legal form. Where the consideration for the disposal includes amounts in respect of the enjoyment or exercise of rights that have accrued prior to the date of disposal (such as royalties payable in arrears and where the disposal occurs between royalty payment dates) then such amounts would be UK-derived amounts.

UK-derived amounts are subject to the normal transfer pricing provisions in Part 4 TIOPA10.

“UK Sales” S608F(3)

UK-derived amounts are based on both direct and indirect UK sales. UK sales are sales of goods, services or other property to customers in the UK or sales provided in the UK. In determining whether a sale is provided in the UK or to UK persons the rules look through persons who acquire and resell goods or services without making any change or modification which is more than merely incidental (as may be the case for some distributors, procurers, retailers or resellers). Whether a sale is provided in the UK or provided to persons in the UK takes its natural meaning, although generally it is likely to be based on the location of the purchaser of the goods or services. The rules for providers of online advertising are applied in such a way so as to ensure that those providers are taxed consistently with the providers of other goods and services, so that such services will only amount to UK sales where the advertising targets persons in the UK.

Example 2

Company A is within scope of Chapter 2A. It holds the licence to manufacture and sell painkillers in the EMEA region. Company A sells the painkillers to Company B, a reseller which sells to a mix of UK and EMEA persons. Company B is a connected UK resident company.

Company B buys the tablets in bulk and breaks them down into smaller unit sizes for resale. This change is incidental to the provision of the goods, satisfying S608F(5)(b). The tablets’ packaging is labelled with any legal disclaimers and quality assurance testing accreditation required by law for the product to be sold in each relevant jurisdiction, which is also likely to be merely incidental to the provision of the painkillers. No changes are made to the packaging elements in terms of branding etc. In the context of the pharmaceutical industry, this legal and quality assurance information is also likely to be merely incidental to the provision of the painkillers.

The result of this is that none of the sales from Company A to Company B are included within UK Sales, however sales by Company B to UK persons are included.

Direct UK sales

UK sales include the chargeable person’s direct sales to customers in the UK or those that are provided in the UK. This includes business-to-consumer and business-to-business transactions.

Direct UK sales include where the chargeable person has directly licensed IP (or directly made sales where the IP is embedded in the good or service) to either related or third party customers in the UK.

Example 3

There is a UK sale where a chargeable person licenses the right to a pharmaceutical patent directly to a UK business customer. UK sales would also include where the chargeable person itself manufactures a pharmaceutical product (exploiting a patent they own) and then sells this product (with embedded IP) to a UK customer.

Indirect sales

UK sales will also include the chargeable person’s indirect UK sales. This may comprise sales by a person related to the chargeable person to (related or third party) customers in the UK. The related person making the sales may be located either inside or outside the UK. It may also include sales by persons unrelated to the chargeable person, subject to section 608GA.

Example 4

A multinational group that produces software holds IP rights in a company that is within the scope of Chapter 2A and that company licences those rights to a group company resident in Ireland. The Irish company sells software to a person in the UK, downloadable from its website. This is a UK sale as the service has been provided to a customer in the UK.

Example 5

A food and drink group entity is within the scope of Chapter 2A. A UK resident individual buys some of the branded food and drink, from the group, whilst on a holiday outside the UK. This is not a UK sale as the goods were not provided in the UK nor to a person in the UK.

Resellers

ITTOIA05/Ch2A/S608F(4)

In determining whether a sale is provided in the UK or to UK persons the legislation looks through persons who acquire and resell goods, services or other property without making any change or modification (for example distributors, procurers, retailers or other resellers). So the meaning of UK sales is modified where goods and services are sold to a UK related or unrelated reseller. These sales will give rise to UK sales to the extent the UK reseller’s sales are UK sales. A similar look-through treatment would be adopted if the reseller was based outside the UK or where there is a chain of resellers. It does not matter whether the reseller is a related or unrelated party for this rule to be applied. This provides a symmetrical outcome where goods and services are sold to a non-UK related or unrelated reseller and then subsequently sold in the UK.

Goods, services or other property provided for resale are defined in the legislation as not being changed at all, or where they are altered, the change is purely incidental to their provision. This is likely to include items on-sold by retailers, wholesalers and procurers.

Example 6

A multinational group selling patented smart phones is within the scope of Chapter 2A. It makes sales to the UK and the rest of Europe via a master distribution centre in the UK. The distribution centre does not make any changes to the product nor add any branded packaging, bulk goods are merely broken down into smaller units for resale. The product is in its final state; difference in unit size is merely incidental to the provision of the phones. S608F(5) is satisfied, and so in calculating UK sales, it is only the smart phones sold to customers in the UK that are included and not those that are sold to third parties elsewhere in Europe.

Online Advertising Services

Sales provided in the UK include online advertising services where they are targeted at persons in the UK. This will apply regardless of whether or not the purchaser of the advertising services is a UK person. In considering whether or not advertising has been targeted at persons in the UK, the following non-exhaustive list of factors may be relevant:

  • it is reflected in the relevant contracts and the pricing thereof
  • the website permits sales in UK sterling or shipping to the UK
  • the website is in English and accessible by UK users
  • the purchaser of the advertising service having a physical presence in the UK and/or
  • the website advertised has a UK domain
  • geolocation data showing the geographic location of the devices upon which online advertising was accessed

Example 7

A multinational generates online advertising revenue and is within the scope of Chapter 2A. It provides online advertising services to businesses operating both in and outside the UK. UK sales would be recognised to the extent that the online advertising was targeted at the UK market place. Therefore if it sold advertising targeting the UK market, to an unrelated French business, this would be reflected in its UK sales to the extent the advertising targeted the UK.