»Ê¹ÚÌåÓýapp

Transfer Pricing

In the context of the Patent Box there is a risk of UK taxpayers shifting profits from one entity (the advantaged person) to another entity (the disadvantaged person) who is a Patent Box claimant. »Ê¹ÚÌåÓýapp shifted profit benefits from the differential between the normal CT rate and the beneficial 10% rate.

However, there is an exemption from transfer pricing rules for the vast majority of transactions carried out by businesses that are EU small or medium enterprises. »Ê¹ÚÌåÓýappre are some exceptions to this in TIOPA10/S167 and S168. S168 can require a medium sized enterprise to use arm’s length principles on receipt of a notice from HMRC.

TIOPA10/S167A provides another exception to the small enterprises exemption. This allows HMRC to issue transfer pricing notices to reapply TIOPA10/Part 4 to provisions of a small enterprise where at least one provision involves a transaction taken into account in an affected person’s calculation of Patent Box profits.

Double Taxation Relief

TIOPA10/S44 to 48 allows double taxation relief (‘DTR�) for withholding tax (‘WHT�) on patent royalties up to the amount of corporation tax payable on the transaction, arrangement or asset in respect of which the royalties are paid.

»Ê¹ÚÌåÓýapp Patent Box deduction will be bought into the DTR calculation and by reducing the CT chargeable may result in a restriction of the DTR available.

Example

A simple example of a DTR calculation including the Patent Box is given below:

A company has royalty income of £1000 from licensing one of its patents.

£400 of this comes from overseas territories, on which the company has suffered a total of £30 of overseas WHT.

»Ê¹ÚÌåÓýapp company incurs costs of £400 to generate its royalties, incurred equally for all royalties. It elects into Patent Box and calculates its Patent Box tax deduction as £300. »Ê¹ÚÌåÓýapp company has no routine costs or marketing assets.

»Ê¹ÚÌåÓýapp company’s DTR calculation under section 44 would look be as follows:

Royalty = £400

Share of costs = (£400/£1000) x £400= (£160)

Share of Patent Box tax deduction = (£400/£1000) x £300 = (£120)

Corporation tax profit = £120

Corporation Tax @ 21% = £25

WHT Suffered = £30

»Ê¹ÚÌåÓýapp company’s DTR is therefore limited to £25 and the CT computation will be as follows:

Royalties = £1000

Costs = (£400)

Patent Box deduction = (£300)

Corporation tax profit = £300

Corporation tax @21% = £63

DTR = (£25)

CT Payable = £38