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HMRC internal manual

Double Taxation Relief Manual

Non-residents: UK income: Returns and reports: Enquiries by FICO - royalty rate

It will often be difficult to establish whether or not the rate at which the royalty is paid is excessive at the time the overseas claimant seeks relief from United Kingdom tax. If our only concern is the royalty rate we may authorise the payment of royalties subject to the rate of United Kingdom tax specified in the relevant agreement, provided that it is made clear to the United Kingdom payer that this does not mean that the Inland Revenue accept that the royalty rate is an arm’s length rate and that the issue may be revisited at a later date, ie as part of a transfer pricing enquiry. FICO will normally inform the United Kingdom royalty payer of this. If the District has any reservations about the royalty rate, or how payments of royalties paid to the non-resident have been calculated, these should be set out in a memo to FICO.

When considering a transfer pricing review we need to consider

a) whether the intangible assets which have given rise to the royalty payments were developed in the United Kingdom and subsequently transferred abroad. If they were, it is possible that the rights have been transferred abroad at under value;
b) whether the royalty payments seem excessive in relation to the payer’s net profits, and the extent to which the royalties relate to the actual benefits received;
c) whether the rights have been paid for twice. This would arise if payments for intangible assets had been included in the cost of goods purchased as well as being the subject of a separate royalty charge.