10 questions answering everything you want to know about transfer pricing

1. What is it? Transfer pricing is the charges made by one enterprise to another within the same group, (they don’t need to be legal entities)

2. Why is it important?

It is often used by businesses (enterprises) to move profits to low tax jurisdictions

3. What does it cover?

Sale of goods

Provision of services, including management fees

License of intangibles, patents

Use of money, interest rates and thin capitalised businesses

Use of tangible property

Or the non-charge for these

4. How does HMRC confirm the pricing is correct?

By using an “at arms lengths” test know as Comparable Uncontrolled Price (CUP). Of course this isn’t always available so the HMRC can also use

Resale price

Cost plus

Profit split

Residual profit split

Transactional net margin

5. Burden of proof

Is with HMRC, although governed by the OECD. Article 9 of the Model Tax Convention

forms the basis of bilateral tax treaties involving OECD member countries

Taxpayers are only expected to provide documentation which would be reasonable for them to have in their possession.

From the taxpayer’s point of view, the OECD guidance only requires documentation to be kept which would be consistent with the evaluation of any other business decision.

6. What records need to be kept?

Only the records that would normally be expected to be kept by a business. HMRC can’t ask for anything else.

Documentation must exist at latest by the time the Corporation Tax return is filed.

7.  What can be done to mitigate?

Entering into an Advance Pricing Agreement (APA) with HMRC, it’s preferable to a retrospective examination of the enterprise’s transfer pricing policies

It is binding on HMRC and the company over an agreed period, usually 3 to 5 years

8. Who needs to be worried?

Obviously all large organisations, medium enterprises are subject to power of direction, which means they don’t have to self-assess. The HM Revenue and Customs would only make a power of direction against one of these companies in exceptional circumstances.

A small enterprise is completely exempt from the transfer pricing rules, unless the other party is a related party in a country without a non-discrimination clause typically, a tax haven.

9.  So what’s the definition?

Enterprise Category

Headcount

Turnover

Balance Sheet Value

Medium

<250

Not to exceeding €50m

Not exceeding €43m

Small

<50

Not to exceeding €10m

Not exceeding €10m

Macro

<50

Not to exceeding €2m

Not exceeding €2m

10. To encourage UK businesses to not park their patents overseas HMRC introduced the Patent Box 10% CT rule.

The Patent Box enables companies to apply a lower rate of Corporation Tax to profits earned after 1 April 2013 from its patented inventions and certain other innovations. The relief will be phased in from 1 April 2013 and the lower rate of Corporation Tax to be applied will be 10 per cent.