A hypothetical US company, Uncle Sam Music Inc. (USMI), decides to expand its internet music offerings to Europe. USMI has distribution rights to a well-stocked music library. It is going to allow UK and European consumers to download music tracks at €1 per track in B2C transactions. The tracks are configured or cached on USMI’s servers located in various jurisdictions and on payment by credit card are available for download and burning onto CDs by the end users without re-sale rights. What are the corporate income tax issues facing USMI in its new European sales territory?
As far as the UK is concerned the following tax issues arise:
- Is USMI trading in the UK or with the UK? It depends on factors such as where contracts with end users are concluded.
- Agency issues: does USMI use UK companies or affiliate websites as “sales agents” in distributing its content? A “Dependent” agent can be regarded by HMRC of the UK as a “Permanent Establishment” or taxable presence in the UK of the US entity without the existence of an actual office of USMI in the UK.
- Server: If USMI hosts its website on a computer server located in the UK, can that server be regarded as a PE?
- Income characterisation: Is the income of €1 per track a sale (subject to business profits tax treatment) or a licence fee subject to withholding tax?
The above is only a small sample of direct tax issues that USMI will face in the UK. The issues could differ depending on the European country that is the sales territory.
Apart from the corporate income tax issues outlined above the VAT (Value Added Tax) analysis for USMI could be quite complex. Assuming USMI has no establishments at all in Europe, does it charge no VAT on the €1 transactions? Right? Wrong. It must charge VAT but the mechanics of VAT registration differ upon the choices USMI makes. If USMI sets up an office in the EU which country(s) VAT will it have to charge? Does the answer change under the implementation of the VAT Package? If USMI offers licences to European companies to distribute its rights in B2B transactions what will be the VAT consequences? Read other articles on our website to find out the answers or contact us.