In the transfer pricing (TP) arena, we can expect wider-reaching audit activity from HMRC, increased attention to intangible ownership worldwide, and a focus on internal IP management in the light of new UK Patent Box legislation.
The transfer pricing of intangibles, a perennial issue for many international groups, will be of particular focus during 2012, with OECD Working Party No 6 continuing work on guidelines. Despite lengthy taxpayer consultation, on a number of issues it is proving difficult to obtain consensus across business sectors, let alone between taxpayers and authorities. The importance of this exercise is clear, and it must be considered alongside ongoing developments and case law expected throughout 2012 on treatment of intangibles in OECD non-member countries such as India and China.
On the intellectual property theme, UK ‘Patent Box’ legislation to be published in the 2012 Finance Bill promises to result in an increase in R&D activity and intangible ownership in the UK with companies benefiting from a reduced 10% tax rate for patent-related profits. Detailed rules are likely to incorporate a number of key elements that are based on TP principles. UK companies need to carefully consider existing transfer pricing of group IP and R&D activity to ensure that appropriate internal commercial and business structures are in place to make most effective use of the new UK regulations at the beginning of 2013.
Turning to compliance, the UK government’s increasing focus on perceived ‘profit shifting’ and continuing discussion in 2012 of possible introduction of general anti-avoidance rules will have a very real impact on how multinationals defend their transfer pricing from both domestic and international standpoints. Senior government figures are becoming ever more vocal about UK corporates ‘playing the system’ in relation to tax and transfer pricing, as a result of which we will continue to see intensive HMRC transfer pricing audits across every business sector in relation to transactions with those jurisdictions traditionally seen as ‘tax havens’. As HMRC becomes more sophisticated in its challenges to TP, companies simply cannot rely on non-contemporaneous analysis and pricing that may have historically been accepted at audit, and regular review and updating of documentation will be critical.
HMRC transfer pricing statistics released for the first time at the end of 2011 also show that smaller UK groups are coming under particular scrutiny. With a streamlined audit process combined with significant ‘tax cash’ yield to HMRC from companies not previously subject to detailed audit of transfer prices, this trend will only rise with more UK multinationals falling into the TP inquiry net during 2012.
Nick Foster-Taylor, Consultant, CMS Cameron McKenna