INTM489807 - Diverted Profits Tax: application of Diverted Profits Tax: examples and particular situations: intangible assets

Where IP has been transferred from a UK group company to one subject to a lower rate of tax, the effective tax mismatch condition may either be met in respect of expenses that become payable by the UK company or in respect of income which would otherwise have been taken into account in computing its liability to tax.

In considering the insufficient economic substance test the following factors are likely to need to be taken into account:

  • The use of the IP in or from the UK, in comparison with use in or from other parts of the world.
  • Whether there has been a separation of ownership from the functions needed to properly manage the asset, and if so, the extent to which those functions are performed in the UK.
  • Cost synergies as a result of using a centralisation model (but not those based on the original centralisation having been tax-driven).
  • Extra costs associated with the transfer, including taxes paid on exit.
  • Whether, had the asset remained in the UK, any tax deductible amortisation of the asset would have sheltered UK income (so that no less tax is payable as a result of the transfer than if the IP had been held in the UK).
  • Any cost-benefit analysis produced, whether at the time that the transaction was undertaken or subsequently.

The functions needed to properly manage the asset will be those in relation to the development, enhancement, maintenance, protection and exploitation of the intangible property. The fact that IP was originally developed in the UK before being transferred to another group company does not in itself mean that taxable diverted profits will arise, even if the transfer results in payments being made from the UK in respect of that IP. In particular it may be possible to reach a reasonable conclusion that transactions or the involvement of any entity were not designed to secure a particular tax reduction (see INTM489765) with reference to the sort of factors mentioned above.