transfer pricing and benchmarking

transfer pricing and benchmarking

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If a subsidiary of a non UK company operating in the UK enters into a royalty or licence agreement with its parent or some other group company it would need to demonstrate that the rate of royalty was an arms length rate and this would usually be done by benchmarking - finding real arms length situations that show that 4.7% (or whatever) can be considered an arms length rate. No doubt this has been done in a professional way.

But what about the commercial reality. What business is going to pay a 4.7% royalty year after year after year when it leads to that business making no profit? Surely that lack of profit demonstrates that the rate of 4.7% is too high and that the brand etc is not worth a royalty of that level.

Why isn't HMRC following that line of arguement?

Or am I missing something?

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By djw090
13th Dec 2012 11:35

Are they licencing anything special

One of the only reported points in the select committee proceedings that indicated that anyone there had a working knowledge of the relevant regulations was when the man from Starbucks said that they had agreed a 4.7% licence fee with HMRC despite them charging 6% to none subsidiary licencees in other countries. ie a third party benchmark.

However, I agree with you that while they have that particular point covered the overall impact is to generate something non-commercial.

As other chains (in the UK and overseas) have demonstrated, there is nothing special in the overall Starbucks formula. When I was in Berlin earlier this year I used the Eistein chain of coffee shops. They do what Starbucks do but perhaps better and I don't see anyone taking IP infringement action against them.

Years ago I was FD of the UK based subgroup of a Japanese listed group. We were always having problems with the tax treatment of interest due the then thin capitalisation rules. The interest payments were considered to relate to a capital structure that could not be replicated by a standalone business. As far as I am aware those rules have been dropped. In the light of recent criticism of  foreign multinationals perhaps they need to be reintroduced.

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By Alan Ferris
13th Dec 2012 11:37

Wrong direction

The facts of the case are that Starbucks are towning the legal line and there is nothing HMRC can do.  So it seems a shame that everybody seems to support the MP's against HMRC and the company when neither has done anything wrong.  HMRC and companies are targeted with paying the correct amount of tax, not the "moral" tax that the papers and MP's seem to think si due.

Whilst all this goes on the realy abuses of the system are ignored and the real cheats can get away with it.

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