Chapter 34 Transfer Pricing Flashcards
34.2 When the transfer pricing rules apply
Apply to transactions between connected companies which take place at non-arm’s length prices that one of the parties obtains a UK tax advantage. An arm’s length price is that which would have been charged if the companies were independent parties. A tax advantage arises if a smaller amount is taken into account in calculating the chargeable profits or a larger amount is taken in calculating any losses. The rules apply to all transactions between connected parties, not just the sale of goods.
34.3 Implications of transfer pricing rules
The effect of the rules is that the company that has obtained a UK tax advantage is required to make an adjustment in its tax computation to reflect an arm’s length price. If the other company is also UK resident it may have paid more tax, so the disadvantaged company can claim for a corresponding adjustment based on the arm’s length price to also be used in computing its taxable profits. The adjustment is only for the purpose of tax calculations and the accounts do not have to reflect this.
34.4 exemption for dormant companies and small and medium sized companies
Dormant companies – TP rules do not apply where the advantaged person is a dormant company, for example where a dormant company has made an interest free loan to a connected party.
Small and medium sized companies – TP rules do not apply where the advantaged person is a small or medium sized enterprise. The definition of a small company is less than 50 employees, with turnover and a balance sheet of less than or equal to 10 million euros. A medium company has less than 250 employees and a turnover of less than 50 million euros or a balance sheet of less than 43 million euros.
34.6 Record keeping
The company has to keep records to justify the transfer prices used or adjustments in the computations. There should be documentation to support all intra-group transfer prices, including management services. Documentation should be kept of all major decisions affecting the transfer prices.
