Please Guardian, get it right on the taxation of royalties

Revenue and Customs is only supposed to permit such arrangements if multinational groups can demonstrate that brand licensing agreements, or any other intra-group trading, are conducted at \”arm\’s length\” – that is, as if the companies are not part of the same group.

No. That rate should indeed be arms length. But the actual arrangement: well, if it\’s to another company in the EU it\’s actually illegal for HMRC to try to tax such payments. The importance being here that:

David Cameron this month pledged to make \”damn sure\” such firms pay their fair share in the future. \”It\’s simply not fair and not right what some of them are doing by saying: \’I\’ve got lots of sales in here in the UK but I\’m going to pay a sort of royalty fee to another company that I own in another country that has some special tax dispensation.\’\”

Cameron can bluster all he wants. It\’s just not a piece of law he has any control over.


11 thoughts on “Please Guardian, get it right on the taxation of royalties”

  1. I’m not sure what you’re trying to say here.

    If the licensing agreement with a company elsewhere in the EU satisfies HMRC that it is indeed arm’s length, then HMRC can’t tax it under EU law. Obviously. Just as they can’t tax your payments to buy scandium from someone in Germany.

    But if HMRC determines that the arrangement is rigged, then of course they can tax it (or, more accurately, they can tax the company on the basis of what its profits would have been before the element of the payment that is deemed to be above arm’s length rates was made).

  2. Cameron? Bluster? Say it ain’t so! Still, he may be weaselly but he appears to be sane, which puts him one up on Blair and Brown.

  3. Cameron can bluster all he wants. It’s just not a piece of law he has any control over.

    And this is the mystery to me because at some point in the future, he will have to admit that. So why not come clean and just say that’s how transfer pricing works, and also how the Single Market works? Instead of taxing the fuck out of everything, why doesn’t he come up with some ideas to make the UK a more attractive place to do business? Why pander to the lefty narrative?

  4. With JohnB.

    So, it’s illegal for country A to tax the profits made by a company in other EU-country B. But it’s also illegal (somehow) for company in country A to transfer all its profits to country B purely for the purposes of reducing its tax burden. So if a company does that it can indeed be taxed on those theoretical profits in country A.

    What is the problem here? We have a quite reasonable law that you can’t tax stuff outside your jurisdiction, and almost certainly some attempts to take advantage of that, by shifting profits to where they will be taxed less. And don’t we have a whole branch of the civil service whose job it is to determine how much of that is going on, and to stop it?

    It’s entirely reasonable that I can’t get around UK taxes by buying a carrot for £1,000,000 from a Luxembourg subsidiary.

    Which makes one worry about economic diversity. It makes sense to have all your “rights” stuff in places like Luxembourg or Switzerland. Places that being small can get away with low tax rates, and thrive off the higher revenues that get sucked in from elsewhere as a result. As much as tax is hateful, could large countries like the UK or Germany actually compete with these on taxation? And if they don’t, how much economic activity, especially innovative stuff and IP, will get sucked into places like Luxembourg?

  5. I agree with JohnB and JamesV. As much as I don’t like taxation, as I think taxation is wasteful, etc, I’d rather it be my government wasting the taxes from economic activity in my country.

  6. Does multinational in this context mean EU plus other nations or (for example) UK plus other nations even if they are in the EU?

  7. johnb is almost right. The EU protection is only available for a genuine royalty, not an artificially inflated one.

    But on Tim’s side, the ECJ hurdle for determining something to be artificial is probably higher than our usual transfer pricing rule (the ECJ point being a general abuse of law doctrine rather than our statutory transfer pricing test), so there probably are payments that our transfer pricing rules would disallow but the ECJ would e happy with.

    But johnb is wrong to say that it can be taxed “if HMRC determines that the arrangement is rigged”. We have this rule of law thing here (much to the politicians’ dismay), and so it’s if the courts determine, not HMRC.

  8. @Gareth, to what extent is this really an EU thing? There’s some EU law banning the taxation of activities in other member states (Tim knows more about it than I do) but to what extent is the law even relevant or necessary?

    If you have a company active in the UK and sending royalty payments to another company in, say, Ghana, those are presumably acceptable and reasonable expenses – they reduce the profit margin and hence the tax due. Likewise, it’s blindingly obvious that the UK cannot tax the proceeds of a, say, Ghanaian company on its activities in Kenya. So the existence of this law on taxing stuff between EU states seems moot to me. It exempts from taxation activities which it is in any case not the business of the relevant authority to tax.

  9. JamesV,

    Thanks for that explanation. I think I was getting confused between what Amazon does (based in one member state and trades across the EU) versus what Starbucks does (several companies in several member states paying royalties to Starbucks Netherlands).

    Having dived into the HMRC website I have read that even the EU directive exempting cross border interest and royalties from taxation can be ignored if HMRC thinks abuse is taking place. In the case of Starbucks HMRC did get them to reduce their royalties from 6% to 4.7% somehow.

  10. JamesV (#8), the EU thing is relevant.

    When the UK company pays a royalty to the Ghana company, the UK will levy a 20% withholding tax on that royalty (because it has a UK source, so is UK income).

    The UK company will pay 80% of the royalty to the Ghana company and 20% to HMRC, but although the UK company makes the payment it is technically the Ghana company’s tax.

    But if the royalty is paid to another EU company, an EU directive prevents the UK from charging that withholding tax.

    (withholding taxes are also often reduced or eliminated by double tax treaties, but that will depend on the specific treaty between the UK and whichever country the royalty is being paid to)

Leave a Reply

Your email address will not be published. Required fields are marked *