CIRD260160 - Patent Box: supplementary: interaction with TIOPA 2010
CIRD260160 - Patent Box: supplementary: interaction with TIOPA 2010
Transfer Pricing
In the context of the Patent Box there is a risk of UK taxpayers shifting profits from one entity (the disadvantaged person) to another entity (the advantaged person) who is a company elected into the Patent Box. Where the shifted profits qualify as relevant IP profits, the Patent Box company benefits from the differential between the normal CT rate and the reduced10% rate.
However, there is an exemption from the transfer pricing rules for the vast majority of transactions carried out by businesses that are small or medium enterprises under TIOPA10/S166. There 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 enterprise exemption. This allows HMRC to issue a transfer pricing notice to apply TIOPA10/Part 4 to provisions of a small enterprise made or imposed by means of a transaction or series of transactions taken into account in an affected person’s calculation of relevant IP profits for the Patent Box computation.
Where a transfer pricing adjustment is made to a provision made or imposed by means of a transaction or a series of transactions taken into account in the calculation of relevant IP profits of a company elected into the Patent Box, it is necessary to redo the Patent Box calculation in its entirety to ensure that any tax due or Patent Box losses are properly calculated as per the steps outlined at CIRD275000.
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.
The 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.
The 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. The company has no routine costs or marketing assets.
The 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
The 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