INTM630210 - Royalty Withholding: Anti Treaty Shopping Rules: Overview

FA16 introduced S917A ITA 2007. This section prevents exploitation of double taxation agreements (DTAs) in certain circumstances. The section applies to arrangements where:

• a person makes an intellectual property royalty payment,
• the payment is to a connected party,
• that payment is made under DTA tax avoidance arrangements.

ITA07/S917A(2) ensures the rule applies to deny treaty benefits that would otherwise be due under a DTA. The section overrides TIOPA10/S6 which applies generally to give provision of a DTA priority over domestic law.

ITA07/S917A applies to any payments made on or after 17 March 2016. This includes any payments made under arrangements entered into before this date by virtue of FA16/S42(2).

Background

Many of the UK’s DTAs contain provisions that restrict treaty benefits where arrangements are contrary to the purpose of that treaty. Such a provision may be included in the royalties article of the DTA or a Principle Purpose Test may apply to all provisions of the treaty. Where such a provision exists in a treaty and that provision does not apply to arrangements, then S917A will also not apply as the two rules seek to achieve the same purpose. S917A is intended to apply to treaties that do not already contain a purpose test.

The OECD BEPS project also considered treaty abuse. Action 15 recommended implementation of a multilateral instrument to amend bilateral tax treaties. Once effective, this will include a ‘principal purpose test’ (PPT) in treaties with jurisdictions that sign up to the MLI that will restrict treaty benefits in abusive arrangements. It follows that S917A will likewise not apply to such treaties once the MLI comes into effect; the PPT will prevent treaty abuse.