Transfer pricing: catching up with tech companies

Transfer pricing rules raise some important issues for the tech and media industry. With the IP often located in a low-tax jurisdiction and one or more companies operating across a multitude of jurisdictions worldwide with the ability to exploit any IP held, it is no wonder that global tax authorities are clamping down.

In the absence of transfer pricing legislation, the almost borderless digital economy within which these companies operate would offer the perfect environment for utilising transfer pricing as a vehicle for the shifting of profits earned through activities in high-tax jurisdictions, to low-tax jurisdictions – a technique used by some to take full advantage of differing tax rates across countries of operation which has caught the attention of the press worldwide.

The UK transfer pricing rules primarily affect ‘large’ intra-group transactions. The basic rule is that where a transaction is undertaken between two parties that are ‘connected’ that confers a UK tax advantage on one of those parties, adjustments must be made to the tax return(s) to reflect an ‘arm’s-length’ price. The effect is to impose a price upon the transaction which has been calculated by reference to the price that would have been imposed in similar transactions undertaken between wholly independent parties, thereby eliminating any influence of the connected parties.

There is an exemption in place for smaller companies, which is contingent upon a company not exceeding set limits for turnover, assets and number of employees. However, in assessing whether a company exceeds these limits, consideration must also be given to any linked or partnership enterprises. 

In setting a transfer price that will comply with the rules, a company will need to consider the idiosyncrasies of their product or service, and the difficulties inherent in locating a suitable benchmark where for example, a company licenses the use of intangible software. Company-specific transfer pricing studies carry out extensive research into the industry and like transactions, making use of several methods to calculate a suitable arm’s-length price for the transaction in question.

To discuss any issues relating to tax and international business in the technology and media sector, please get in touch.

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Mark Ayres