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UK: IP tax diversion compliance – time to review your IP transfer pricing structure

The UK tax authority (HMRC) has announced a new Profits Diversion Compliance Facility (PDCF), as part of its efforts to ensure that multinationals do not use artificial arrangements to divert profit to lower tax jurisdictions. This gives multinationals a window to take the initiative and explain their legal and operational structures before HMRC launch their next wave of full-scale “transfer pricing” investigations into corporates at the end of 2019.

Who will the PDCF affect?

IP is the core value-generating asset for a large number of multinationals. Managing IP in a more efficient and effective way has been on the agenda of most large global groups and has often led to the creation of IP “hubs” (ie jurisdictions which concentrate the profits from the exploitation of the IP portfolio).

As IP has potential to produce a substantial amount of profits, it has also been one of the key focus areas for tax authorities to ensure that IP assets are not used to divert profit to jurisdictions with lower taxation.

The PDCF will be particularly relevant to groups with long established transfer pricing (TP) models (that’s the way tax people divide up the pie between different countries), which Her Majesty’s Revenue and Customs (HMRC) now believe need updating.

Based on our discussions, HMRC is serious about launching the next wave of investigations. All multinationals holding valuable IP portfolios are likely to be at risk if measures are not taken to ensure their TP can be supported and explained to HMRC. This applies to both groups that hold their IP in the UK or where the UK pays for royalties or through other means to exploit IP held elsewhere.

Take advantage of the window: full-scale IP tax investigations ahead

Full-scale HMRC investigations are intrusive. HMRC is also confident that when they launch investigations they will recover significant tax. This is based on recent high-profile successes. There is also a real prospect that a corporate subject to one of those investigations will suffer penalties.  So 2019 is a window of opportunity for multinationals to review, assess and modify their IP structure as appropriate. Companies wishing to take advantage of the PCDF will need to register by the end of 2019.

Firms with valuable IP that earn significant profit from the UK market and who have adopted “old-style” transfer pricing models are particularly at risk. The new facility will require a review of past years (typically back to 2015) as well as current years, and will likely give some comfort for future years.

Our specialist tax and transfer pricing team can help

Having worked on some of the biggest recent investigations, our team of transfer pricing and contentious tax specialists are here to talk you through the issues and their first-hand insights into HMRC’s perspective.

The Hogan Lovells team includes HMRC’s former lead transfer pricing economist who was closely involved in developing HMRC’s current approach to transfer pricing, and a team of technical international tax experts, so we can quickly take stock and tell you where you stand.

As managing and protecting IP effectively and efficiently are key priorities that should be measured up against any potential tax risk, our IP and supply chain experts can ensure your IP holding structure is made more robust to avoid future conflicts with HMRC whilst ensuring your IP portfolio’s protection and ability to continue to generate value for the business.