HMRC are expected to start targeting IP in transfer pricing enquiries this year, having been forced to back down over plans to widen the extent to which they can tax the IP income of foreign subsidiaries of UK companies. Possible new penalties – of at least 10% of the tax lost as a result of insufficient transfer pricing – are expected to be introduced in the ongoing powers and penalties review. Transfer pricing enquiries can be expensive: GlaxoSmithKline’s 14 year transfer pricing dispute with the US tax authority ended in a payment reputed to be around $3.4bn.
Transfer pricing is the price at which companies within the same group sells goods and services to each other – transactions which account for more than half of all trade worldwide. Many countries require such transfer pricing to be at market rates, or at ‘arms length’, to reduce opportunities to take advantage of different tax regimes (eg: sell at a low price from a high tax country company to a low tax country company, and vice versa).
To date, the focus has been on tangible goods and, to a lesser extent, services – not least because HMRC understands these and the transactions relating to them are easier to identify. However, the continuing shortfall in tax (both actual and perceived – the ‘tax gap’ that the Government complain about) means that HMRC are likely to look more closely at the wilder areas of intra-group transactions to try and claim taxes there.
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