Transfer pricing

Question 1

Definition of transfer pricing

Answer 1

Price for transactions between connected parties should be the same if the transaction was between independent third parties acting on an arms length basis

Exemption for dormant companies

Medium + small exempt unless
- elected not to be exempt
- other party is from a non-qualifying territory
- a TP notice is issued to it

Question 2

What would happen if a tax advantage has arisen

Answer 2

1. HMRC may make an adjustment to increase taxable profits or reduce available losses to the advantaged person

1b. (Overseas) If the jurisdiction has a UK DTT then it may be possible to negotiate a compensating adjustment. This is called a mutual agreement procedure (MAP)

2. The disadvantaged person (if subject to CT) may make a corresponding adjustment to its tax return
3. These are tax only adjustments with no impact on accounts or the final price payable
4. The disadvantaged person may make a balancing payment to the advantaged person up to the value of the corresponding adjustment without either party suffering any UK tax consequences
5. Where the disadvantaged person is subject to UK income tax, any excess interest which has been subject to a TP arrangement is treated as a dividend paid to the diadvantaged person

Question 3

How could a company avoid any adjustments in a CTSA return

Answer 3

Enter into advance pricing agreements with HMRC to provide certainty that internal prices charged meet their approval, avoiding the need for any adjustments

Usually only granted where issues are complex or risk of double taxation

Question 4

What are the OECD TP methods

Functional analysis is appropriate, depends on circumstances

Answer 4

1. CUP (Comparable uncontrolled price)
   - when there is a transaction with a third party that is equivalent in all major aspects to the transaction
2. C+ (cost plus)
   - costs + appropriate margin
   - e.g manufacturing or low value admin
3. RPM (resale price method)
   - UK selling price less costs and overseas profit
   - used for distributors in absence of a CUP
4. Transactional profit split method
   - splitting profit between various different enterprises involved with the product
5. TNMM (Transactional net margin)
   Profit calculated by taking a % of either turnover or capital employed

Question 5

What is the set procedure for an APA

Answer 5

1. Informal approach to HMRC as an ‘expression of interest’
2. If HMRC deem suitable then a formal application in writing
3. APA covered 3-5 years and is conditional on certain conditions being applied. HMRC can revoke the agreement
4. Penalty of £10k can be applied if false or misleading information is provided in connection with the APa

Question 6

Special rules for UK companies in multinational groups with a consolidated turnover of €750m

Answer 6

1. For accounting periods beginning on or after 1 April 2023, they are required to keep specified TP records, namely a master file and local file consistent with TP guidelines
2. To enable HMRC to access information concerning TP and other BEPS risks, UK parents required to file country-by-country reports of revenue, profit, taxes paid and other measure to HMRC within 12 months of the end of each AP