Transfer Pricing: Transactions and Structures: business structures: valuable intangibles
Intangibles used by business come in many forms, e.g. brand names, trademarks, patents, know-how, manufacturing processes, software, etc. Careful consideration should be given to whether payments for the use of an intangible by one group company to another which owns the intangible are at arm’s length amounts.
It can be difficult to move existing intangible assets without tax consequences. From a tax-planning point of view, it is better to move intangibles at a time of merger or acquisition, or arrange matters so that intangibles are created offshore in a favourable location.
There have been a number of cases where a UK business owning a valuable trade mark sells that trade mark to an overseas affiliate, and then enters into a licence agreement with the new owner - the end result is a flow of royalties out of the UK company to an affiliate. The facts of these cases have shown that non-arm’s length prices have sometimes resulted from these movements. Such schemes have been countered in a number of ways.
- Before new legislation was introduced dealing with the acquisition and disposal of intangibles, there may have been a chargeable gain and in some cases there have been significant valuation issues. Shares & Assets Valuation deal with the valuation of trade marks and other intangible assets (both under the CG code and the new intangibles legislation).
- The question of whether the royalty could be paid gross out of the UK could in some cases be challenged under specific anti-avoidance sections of the royalty Article of the double taxation agreement between the UK and the country which acquires the trade mark. These provisions were clarified in 2000 by what is now TIOPA10/S132 (see INTM440180).
- Using the transfer pricing legislation at TIOPA10/Part 4:
i) Where the functional analysis shows that the actual risk allocation did not follow the contractual risk allocation, the comparability analysis is based on the actual risk allocation
ii) Where the contractual and actual risk allocation is non arm’s length, it may be that comparability adjustments are possible in order to eliminate the effects of any material differences between the controlled transaction and any uncontrolled transaction in order to arrive at an arm’s length price for the actual risk allocation; only in the exceptional circumstances described at paragraph 1.65 of the OECD Transfer Pricing Guidelines can taxable profits be calculated as if the risk allocation was that which would have been agreed at arm’s length (see INTM441030)
iii) Where the guidance at paragraph 1.65 of the Guidelines does not apply, such that it is necessary to evaluate the transaction as structured by the taxpayer, it may still be useful to consider other options realistically available to the parties to determine the profits in the controlled transaction (see paragraph 9.60)
iv) In any restructuring arrangement where there is a disposal of business operations by a UK business to an associated enterprise which then transacts with the UK business as part of those operations, it is important to consider any compensation for the restructuring itself together with any prices for the post-restructuring arrangement. In those circumstances where there is a question as to whether the arrangements would have been agreed between independent parties, it may be possible to determine an arm’s length price by considering the entirety of the arrangements. For example, a UK manufacturing/distribution business may sell its distribution activity to a foreign associated enterprise and continue to sell its products to the distributor. The decision as to how to structure the payments for these arrangements is one for the business to decide. In any comparison with the arm’s length position, it is worth considering the totality of the arrangements, as well as the terms for the restructuring and post-restructuring transactions on their own. CTIAA Business International would like to see any significant cases where valuable brands are sold, followed by the payment of royalties.
Cost sharing arrangements may be used to hold valuable intangibles. Various members of the group will contribute existing intangibles and this can present problems with valuation; see INTM421100.
Business International would like to see any cases where the UK is paying significant amounts for the use of intangible assets where the recipient is based in a low tax territory, or where the valuation of the intangible assets is derived from a method not found in the OECD Guidelines.
The rules relating to the acquisition and disposal of intangible assets will have an effect on some tax strategy. The disposal of any post 1 April 2002 intangibles should be reviewed critically where there is no corresponding taxable receipt. The guidance in the Corporate Intangibles Research and Development Manual should also be consulted.
While contracts may determine the legal or beneficial owners of the resulting intangibles, there may be situations where the facts raise doubts that such arrangements would be found between independent parties.