On 15th October 2015, LCN Legal hosted a private discussion group for in-house transfer pricing professionals, on the transfer pricing aspects of intangibles. The event was held at the Haymarket Hotel in central London, and chaired by Paul Sutton of LCN Legal with assistance from Ian Barron, non-executive adviser to LCN Legal and former VP and Head of Corporate Tax EMEA for American Express. It was co-hosted by Duff & Phelps, represented by Richard Newby and Danny Beeton.
We would like to thank our guests for contributing to a very lively discussion. They included delegate from various large corporates, such as fashion brands ASOS and Burberry, software supplier Misys, and financial institutions Nomura and Wells Fargo.
As at our previous workshops for large corporates, the discussion was held under the “Chatham House Rule”, so as to provide a confidential and safe environment for sharing issues and approaches. The key themes which emerged included the following:
- The challenge of getting board level support for the increased resources required for BEPS compliance, despite the fact that there were no guarantees that compliance would reduce the potential areas of challenge by national tax authorities. In practice, regulatory and “political” compliance would often “trump” tax issues, and it may take a “mini crisis” in BEPS compliance to focus attention and resources on BEPS.
- The view that BEPS compliance may be regarded primarily as “penalty defence”, with the objective to provide sufficient information and explanations, such that tax authorities cannot suggest that there has not been compliance.
- The fact that in some organisations, reputational risk is regarded as the biggest risk associated with tax – linked to the challenge that groups may be exposed to adverse media comment which is not based on a full understanding of the facts.
- The practical challenges around monitoring permanent establishment (PE) risks. In practice, tax functions can only monitor PEs that they were involved in setting up, or that they otherwise know about. Representative offices constitute a particular risk area, since activities may easily evolve into a PE.
- The difficulty of producing master files in practice, and wording responses to questions appropriately. This included the risk of contradicting previous transfer pricing documentation. It was considered unrealistic to expect tax authorities to distinguish between pre-BEPS and post-BEPS positions when reviewing transfer pricing arrangements.
- Serious concerns expressed around the confidentiality of information required to be contained in master files, particularly since that included information about a company’s competitive value within its peer group. Even if the documents themselves are not leaked, it was impossible to control the movement of information in people’s heads.
- The challenge of identifying intangibles other than registered intellectual property rights. It was considered that real intangible value was often know-how, such as the ability to manage an asset base extremely carefully. This know-how may include “negative” experiences as to which approaches were unlikely to work.
- The difficulty of demonstrating the delivery of know-how or other intangibles if required by tax authorities to support the payment of royalties or licence fees. In practice, there will rarely be a neatly packaged bundle of know-how, such as may be provided to a new franchisee under an arms’ length franchise arrangement. The transfer of know-how may happen through the secondment of staff, or simply as a function of the culture of the business.
- The disconnect which often exists between the tax / transfer pricing view intangibles, and the “legal” approach to documenting and enforcing IP rights. Nevertheless, legal documents used by a group externally may give indications of where value is perceived to exist. Such documents may include Non-Disclosure Agreements (NDAs) which clients and suppliers may be required to sign, as well as the non-compete clauses and confidentiality provisions within employee contracts.
- The wide variance in the approaches applied to intercompany agreements to support BEPS and TP compliance – with some groups having very well defined processes to identify, document, sign and update large numbers of intercompany agreements, and other groups having a more sporadic approach. Other drivers for having intercompany agreements aside from corporate tax and BEPS may also exist, such as VAT and regulatory compliance.
- The fact that intercompany agreements will unlikely to have value unless they are updated to reflect the changing practices and business models of the groups concerned. For some groups, it can be useful to involve legal functions not just to prepare intercompany agreements, but also to assist in getting them completed and signed.