The case concerns the legality of a diverted profits tax (DPT) assessment issued by the tax authorities against three UK-based companies in the Thomson Reuters group. The total amount assessed was in excess of £167 million, with Refinitiv Limited receiving the largest assessment. The issue is whether the tax assessments for FY 2015-2018 under UK diverted profit tax-provisions were inconsistent with an Advance Pricing Agreement (APA) previously agreed between the companies and the tax authorities in January 2013. The APA, which covered the period from October 1, 2008 to December 31, 2014, established a transfer pricing method (TNMM/Cost Plus Method) for the pricing of certain intercompany services between UK companies and a Swiss company of the Thomson Reuters group.
The UK companies (TRUK) provided intellectual property (“IP”) services to a Swiss group company (TRGR) which held the group’s main IP assets. According to the tax authorities, these services increased the value of the IP held by the Swiss company and resulted in high profits being allocated to the Swiss company, which was taxed at much lower rates than the UK companies.
According to the tax authorities, the UK companies did not receive the compensation for providing those services that they would have done if the services had been provided at arm’s length. In broad terms, this remained the position until the IP was sold by the Swiss company in 2018 for a very substantial gain, as part of a disposal by the Thomson Reuters group of its “Financial & Risk” (“F&R”) business unit to a new joint venture company, Refinitiv Holdings Limited. It was also part of the tax authorities’ case that the services supplied by the UK companies to the Swiss company throughout the period from 2008 to 2018 contributed (a) to the generation of annual profits by the Swiss company in future years (as well as in the year of supply) and (b) to the value of the IP sold in 2018, and thus to the capital profits made on the sale by the Swiss company in 2018.
Following the expiry of the APA the tax authorities formed the view that in later accounting periods (FY 2015 and onwards) it was no longer appropriate to use a cost-plus methodology in relation to the IP-related DEMPE-services supplied by UK companies to the Swiss company, but a profit-split methodology should be used instead.
“TRUK, through its value-adding services, makes a significant contribution to the value of TRGR’s intangibles and, therefore, it is appropriate that it is compensated by reference to a share of the returns earned by TRGR from the exploitation of the intangibles in two ways: first, by using the intangibles to sell products and services as part of its commercial operations; and second, by selling the intangibles as part of the disposal of the F&R business. Therefore, it is in line with the arm’s length principle for TRUK to be rewarded by reference to a share of the profits generated by TRGR from both the use of intangibles to sell products and services to customers and the IP value crystallised on the sale of the F&R business in 2018.”
The companies appealed, arguing that the tax authorities were bound by the transfer pricing method agreed and applied under the APA. The Upper Tribunal dismissed the companies’ judicial review claim and the companies then appealed to the Court of Appeal.
Judgment
The Court of Appeal considered the statutory framework for corporation tax and DPT, the terms of the APA and the arguments put forward by both parties. The court concluded that the 2018 accounting period falls outside the temporal limits and effective scope of the APA. Therefore, the APA does not apply to the 2018 period and there is no public law objection to the DPT assessments made by the tax authorities for that period. The appeal was dismissed.
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“Neither party, in my judgment, could reasonably have contemplated that, if (as happened) the APA was not renewed, the methodology used and applied for the years covered by the APA should have a continuing and constraining effect on HMRC’s approach to transfer pricing in future accounting periods from 1 January 2015 onwards. Those future periods lay outside the temporal scope of the APA, so in the absence of further agreement each succeeding accounting period must be examined separately for corporation tax purposes unaffected by the APA. Still less, in my judgment, could the parties reasonably have contemplated that the time-limited methodology of the APA should somehow constrain the extent or nature of any charges to DPT that HMRC might later seek to impose on TR UK under legislation that did not yet exist, and had only very recently been announced, when the five-year term of the APA came to an end on 31 December 2014.”
“I am willing to accept that one of the functions of clause 3.1 is to stipulate the temporal limits of the Covered Transactions to the extent that the limits are not made clear in the relevant definitions, but that alone does not begin to explain how the agreed treatment of the transactions could continue to have effect and bind HMRC after the end of the term of the APA. There is, of course, no dispute that HMRC were bound by the APA throughout its term. They have never sought to argue otherwise, or to re-open the transfer pricing treatment agreed for those chargeable periods. But for the reasons I have already given, I can find nothing in the language of the APA to support the notion that the agreed treatment should enjoy a potentially indefinite afterlife in future accounting periods once the term of the APA had come to an end. In truth, the words which I have italicised in Mr Peacock’s submissions on this point are no more than bare assertions, and they do nothing to advance the debate.”
“To conclude, therefore, I am satisfied that the 2018 accounting period of TR UK falls outside the temporal limits and the effective scope of the APA. It is not a period to which the APA relates within the meaning of section 220(1), and there is accordingly no objection in public law to the relevant assessments to DPT raised by HMRC.”
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