TRANSFER PRICING

What Is Transfer Pricing?

Transfer pricing concerns the terms that connected entities use when they conduct business with each other. The issue is of most importance for multinational groups that conduct business across international boundaries. The transfer pricing policy of such groups will often have a significant effect on the amount of profit or loss that is recognised in each of the countries in which they do business. For this reason, the issue of transfer pricing is of great importance both for multinational groups and for tax authorities around the world.

what Are The Tax Implications For UK Companies?

In common with most other industrialised countries, the UK has legislation that requires cross border trading and financial transactions between affiliated entities to be conducted according to the arm’s length standard. This means that the terms and pricing of such transactions undertaken in the course of conducting business (such as the sale and purchase of goods and services) and in the provision of finance (both borrowing and lending) should be the same as if the transactions had been between completely independent parties.

what Do I Need To Do To Comply?

companies must consider which (if any) of their transactions fall within the scope of the legislation and then consider whether the terms of those transactions are in accordance with the arm’s length principle. If they are not, an adjustment to taxable profit may be required.

Companies Must develop appropriate transfer pricing policy and provide documentary evidence in support. The Revenue describe the type of documentation that they would expect, namely:

• A functional analysis; a description of the functions carried out in the UK for the overseas companies and the key risks associated there with them;
• Evidence of the services provided, the costs incurred in providing them and the pricing method adopted for charging fees;
• Agreements between the Uk and overseas, under which the services are charged; and
• Evidence that the management fees are charged on comparable terms for transactions with independent third parties or similar to these charged by independent companies with similar activities.

Penalties For Non Compliance

Under Corporation Tax Self Assessment (CTSA), the Revenue could collect not only the additional tax due on the under charging but also a tax geared penalty of as much as 100% of that tax.

We can help companies establish a transfer pricing model which should provide a strong defence against any challenge, were the Inland Revenue to audit the CTSA tax return.

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For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors Small Business Resource.