Presented by Jay Sanghrajka – Shipleys LLP
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Transfer Pricing – Preliminary
UK Transfer Pricing (TP) Rules – Overview
UK Transfer Pricing filing requirements
HMRC Enquiries
Penalties
HMRC Compliance strategy
Overview of TP Methods
2010 update – Advance Pricing Agreements and
Mutual Agreement Procedure
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TP means the value or price at which transactions takes place
amongst related parties.
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TP are the prices at which an enterprise transfers physical goods
and intangible property and provides services to associated
enterprises.
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TP gain significance because these can be used by the controlling
party to their advantage to minimise tax incidence.
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Approximately 60% of the total transactions across the world are
between related parties.
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If the transactions are across different tax jurisdictions, where tax
rates are different, shifting is beneficial.
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Transfer Pricing rules apply to transactions between related
parties where:
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The business or group is large;
The business elects for it to apply (say, SMEs);
HMRC direct it should apply (medium size entities);
The related party is located in a non-qualifying territory (overseas
country with no DTT with UK or DTT has no non-discrimination
Article).
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Not limited to company transactions – can apply to
transactions between company and controlling individual.
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Where UK transfer pricing rules apply, businesses are
required to “self-assess” the prices used.
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Evidence (documentation) needs to be retained how
the figures arrived at.
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Documentation includes:
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Documentation must be in place before tax return
filed.
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Adjustment to reflect arm’s length price must be made
on tax return.
◦ Detailed analysis of the transaction;
◦ Commercial relationships between related parties;
◦ Prices and terms applying to transactions.
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The amount of the adjustment is that required to bring
the profits up to what they would have been if the
arm’s length provision had applied.
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The UK rules are to be construed in a manner
consistent with:
◦ The expression of the arm’s length principle in Article 9 of the
OECD Model Tax Convention on Income and on Capital
(‘Article 9’) and
◦ The guidance in the OECD’s Transfer Pricing Guidelines for
Multinational Enterprises and Tax Administrations (the ‘OECD
Transfer Pricing Guidelines’).
◦ Prices and terms applying to transactions.
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Returns need to be filed in accordance with the
basic transfer pricing rule. This refers not to the
pricing of transactions between the parties, but the
computation for tax purposes. This means that
taxpayers will be required to make computational
adjustments in cases where transactions, as
recorded in the accounts, are not on an arm’s
length basis and the taxpayer is potentially
advantaged in respect of UK tax by the actual
provision.
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Primary accounting records
Tax adjustment records
Records of transactions with related parties
Evidence to demonstrate an arm’s length result
(this is a key requirement and is usually met by
comparable data/transfer pricing report).
These records need to be available if requested
by HMRC and to the extent that they are required
to file a return that accords with the arm’s length
test.
No transfer pricing policy / no
documentation
Transfer pricing policy in
existence but not properly
followed in practice
Settlement
No agreements or
unclear terms for
group transactions
5%
12%
13%
Policy / documentation
in existence but out of
date or no longer
reflected current
Transfer pricing
policy not defensible
16%
21%
33%
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Penalty up to100% can be charged if liability
understated.
A penalty situation arises if there is an inaccuracy in a
document or return or if notification is not made that
an assessment is understated. For a penalty to be
charged, there must be a loss of tax or an increased
claim to a loss or repayment.
The inaccuracy must also be careless, deliberate, or
deliberate and concealed.
No penalty arises if the inaccuracy occurs despite
taking reasonable care. This contrasts with pre-2008
legislation which provided that a penalty may be due if
an incorrect return was fraudulent or negligently
submitted.
Type of Inaccuracy
Maximum Penalty
Careless
30% of PLR
Deliberate not Concealed
70% of PLR
Deliberate and Concealed
100% of PLR
PLR = Potential Lost Revenue
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In 2008, HMRC set up their specialist “Transfer
Pricing Group” to administer or supervise all UK
transfer pricing – includes transfer pricing
specialists, economists and sector specialists.
UK currently updating CFC, foreign branch and IP
rules, corporate tax rate has been reduced,
foreign dividends exempt since 2009.
Pressure on HMRC to bring in revenue quickly
given state of UK finances.
Adverse publicity for multinationals – Apple,
Google, Starbucks, etc.
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Penalty regime is tougher in principle – will it be
imposed more stringently than in the past?
Success in the “Dixons” litigation in 2008 – but
since then little apparent appetite to go to court on
other large enquiries?
Long running Astra Zeneca enquiry settled for
£505m January 2010 – consensus is that Astra
got a good deal?
Key policy for taxpayers should be to ensure
documentation is up to date to avoid penalties.
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Comparable Uncontrolled Price Method
Resale Price Method
Cost Plus Method
Transactional Net Margin Method
Profit split Method
Fundamentally the UK follows the OECD lead
UK legislation is being updated to reflect revised
OECD guidelines in 2010
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HMRC is currently consulting on both APA and
MAP – an example of them reaching out to
businesses to encourage engagement on TP
issues.
Draft statements of practice have been issued.
These clarify HMRC’s views and procedural best
practice rather than proposing significant changes.
Advance them capitalisation agreements not
affected.
Any questions?