Controlled foreign companies (CFCs) in low tax jurisdictions are a headache for tax authorities, with the potential for profit to be earned at a low tax rate and not contribute to the coffers of the government of the parent company’s location. The potential for profits to be perhaps relocated to the lower tax jurisdiction has resulted in rules to stop such relocation. In the US, the rules are known as Subpart F; in the UK, they are simply the CFC rules.
In both cases, the result of the rules is some or all of the profits of the CFC are attributed to the parent/shareholder, and so become subject to that in that way in the parent/shareholder’s country. In the UK (and elsewhere) these rules haven’t quite kept up with the changes in the way in which businesses – particularly multinationals – are run, and it has become clear over the last decade or so that something needs to change.
Perhaps unsurprisingly, income from IP is one of the concerns with CFCs – IP doesn’t pass any border controls when you move it from one owner to another.
In addition to the patent box paper, the Treasury also published the next round of R&D consultation – this is rather more a summary of responses to the last consultation than new information.
- not ruling out ‘above the line’ R&D relief/credit but the Government still needs to be convinced
- large company subcontractor costs to qualify for the subcontractor only where the subcontractor is aware that it is qualifying R&D and has evidence to this effect
- no plans to extend qualifying expenditure to cover (eg) rent of premises used for R&D
- draft legislation in the Autumn to allow a wider range of externally provided workers to qualify
- no plans to restrict internally created software from being qualifying costs
- improved guidance on whether prototypes will be qualifying R&D – whether the ‘uncertainty’ principle applies
- plans for a pilot scheme will be brought in during the Autumn so that small companies and start-ups can get advance assurances that can be relied on in making R&D claims for several years
The Government is looking for specific responses (by 2 September 2011) on:
- qualifying indirect activities: should the relief be retained? (QIA are hard to define and harder to get relief for)
- should there be some form of certification or election process to provide certainty for subcontractors as to whether the work they are doing is R&D?
- does the removal of the PAYE/NICs limit on the repayable credit require any safeguards?
- does the ‘going concern’ definition need to be reformed, to make it closer to that for EIS/VCT?
The Treasury has published (a few days later than originally advertised) the next round of consultation on the patent box (pdf).
- extended to plant variety rights, data exclusivity and supplementary protection certificates
- will apply to UK and EPO patents only
- will apply to all UK and EPO patents, no matter when commercialised or granted
- to be phased in over 5 years, from 2013/14 – full benefit not until 2017/18
- a seriously complex round of computations will be involved, with analysis of income and expenses across the company and possibly by division required
Responses to the consultation are requested by 2 September 2011.
The OECD Working Party looking at the transfer pricing of intangibles, including intellectual property, met in late March in Paris. The OECD has now published details, including the supporting presentations of that meeting.
Now back in the UK, and with a functioning computer again, I’ve been digging a little further into the other IP proposals in the HM Treasury Corporate Tax reform document, and looking at the review of the intangibles tax regime published by HMRC – see earlier post for the patent box proposals.
The IFS has released its comments on the consultation over the patent box. They have concerns that EU laws would mean that companies could benefit from the patent box without having associated real activity in the UK.
HM Treasury have published the consultation document on IP tax reform, including R&D tax credits – quick thoughts below the cut, more details when I get back from the US next week.
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 OECD has identified transfer pricing issues pertaining to intangibles as a key area of concern to governments and taxpayers, due to insufficient international guidance in particular on the definition, identification and valuation of intangibles for transfer pricing purposes.
The OECD is now considering starting a new project on the Transfer Pricing Aspects of Intangibles which could result in a revision of Chapters VI and VIII of the TPG (which deal with intangibles) and is looking for comments on these issues.