Navigating key transfer pricing (TP) challenges in the technology sector
As the technology sector continues to expand globally, businesses face increasing scrutiny from tax authorities, particularly in the area of transfer pricing (TP). With complex transactions involving intellectual property (IP), intra-group services and evolving workforce models, companies must ensure their TP policies are robust, defensible and aligned with regulatory expectations.
Here, we outline some of the key TP challenges facing the technology sector:
TP challenge 1: Increased HMRC and global scrutiny on technology companies
Tax authorities, including HMRC, are intensifying their focus on technology firms, particularly where:
- high-value IP transactions are involved;
- substance over form is questioned authorities expect TP arrangements to align with real economic activity and value creation, not looking solely at contractual allocations;
- profit-shifting risks are perceived due to cross-border operations.
Action point: Review intercompany agreements and ensure documentation meets OECD guidelines and local requirements.
TP challenge 2: Intellectual property transactions
IP is often the most valuable asset and key value driver in technology companies, making TP critical for:
- analysis of DEMPE functions relating to IP as well as R&D cost-sharing arrangements (avoiding disputes over profit allocation);
- licensing agreements (ensuring arm’s-length royalty rates);
- migration of IP (managing challenges in valuation and potential exit charges).
Risk alert: Incorrect IP pricing can lead to double taxation, penalties or denial of R&D tax reliefs.
TP challenge 3: Intra-group services and cross charges
These are often overlooked but potentially substantial and many technology companies underestimate the importance of:
- recharging shared services (IT support, HR, finance) at arm’s length;
- documenting service-level agreements to justify costs;
- benchmarking fees to avoid HMRC adjustments.
Best practice: Implement a defensible charging mechanism and maintain detailed support for all cross charges.
TP challenge 4: Remote working
The rise of distributed workforces creates TP/tax complexities, such as:
- permanent establishment risks if employees work across jurisdictions;
- allocation of payroll costs and profit attribution;
- VAT and employment tax implications.
Solution: Assess workforce locations and update TP policies to reflect where value is created.
TP policy as a strategic tool for growth
A well-structured TP policy is essential for:
- supporting international expansion without triggering tax disputes;
- maximising R&D tax credits (ensuring costs are correctly allocated);
- accessing Patent Box benefits (requiring clear profit attribution to qualifying IP).
Pro tip: Align TP with business strategy early – retrofitting compliance can be costly.
Help from the experts
Proactive TP management is key. With HMRC and global tax authorities increasing enforcement, technology companies should prioritise TP compliance, documentation and risk assessment. A robust TP framework not only minimises disputes but also supports growth, R&D incentives and tax efficiency.
Our TP specialists can assist you with policy design and compliance, including benchmarking and dispute resolution. Contact us for a no-obligation conversation.
For a broader overview of TP compliance requirements, see: Are your Transfer Pricing policies and documentation ready for HMRC scrutiny?
For insights on managing IP transfers, see: Tax when moving intellectual property intra-group
For background on Patent Box tax relief, see: Boosting innovation in the UK: benefits of Patent Box tax relief in a high-tax landscape
