Transfer Pricing

Question 1

If we have a question asking us about Transfer Pricing - what would be some of the things we would want to speak about.

Answer 1

So the main thing we would want to consider is that the transfer pricing rules would apply in different contexts depending on whether we are dealing with a permanent establishment or controlled foreign company

Permanent Establishment:

In this event, we would want to be mindful that the consideration that we would need to have for would be between the allocation of profits between the UK entity and the overseas operation. This would need to be looked at based on the activities and functions in both jurisdiction and that this has been done at an arms length level.

We want to make sure that we highlight that the relevant documentations and procedures must be in place.

Controlled foreign companies:

In this event we need to be mindful that the risk would arise with the selling of goods and services along with any management expenses - we again would want to make sure that this is done at arms length with the relevant documentations & procedures have been put in place.

What can be done if further clarification is needed?
The company can enter into an Advance Pricing Agreement with HMRC which is a formal agreement between the tax authority on the methodology for determining the transfer prices applies.

Question 2

What would we need to consider in the event that a UK company acts on behalf of a foreign entity

Answer 2

So in this event it should immediately make us think about “acting habitually” i.e. regularly acting on behalf of another entity - if this the case, then there could be multiple implications on this.

This would likely arise in the where there is a group of companies so instead of being a permanent establishment - instead its a separate legal entity (that we would usually expect to not be within UK tax charge).

However, in the event that it could be determined that the UK entity is effectively acting as an agent - this could mean that the overseas company would be deemed to have permanent establishment in the UK that would make them liable to UK corporation tax including payments and making returns.

In the event that a company could be deemed to have been doing this as a “one-off” it might not be deemed to be acting “habitually”

Question 3

What would be some of the implications that we would need to consider in the event that a company was seen to not be engaging with transfer pricing rules

Answer 3

1. The first thing we would want to consider is that HMRC (or the relevant jurisdiction) would effectively tax the additional profits which they deem to have been missed as a result of the transfer pricing agreement, we would then want to be mindful that we would want the other party to also claim relief in line with the additional income so they can also receive relief via additional expenditure - this would be done mutual agreement procedure and would need to be put in place between the two tax authorities.
2. the next thing we want to think about is how the company should impose its transfer pricing model, they should look to the OCED for guidance and effectively apply the “appropriate method”. This should be done by:

A. considering the amount that they charge to third parties for the same goods/services or;

B. if A is not applicable, they would apply the “cost plus” method - which effectively would just be looking at the base cost of the item plus some markup - the company would need to be able to show and prove that the relevant mark-up was adequate

3. The companies could enter into a bilateral Advance Pricing Agreement (APA) to provide certainty on the pricing models that had been applied

Question 4

why is it important to consider transfer pricing rules when thinking about intra-group loans and what should the company be looking to do

Answer 4

It is important to be considering the transfer pricing rules for intragroup loans due to the fact that there is a risk of the company being deemed to be “thinly capitalised” this arises in the circumstances where the is effectively borrowing more from intragroup companies then would be possible in the open market - in this case the interest which is attached to “excess debt” will be disallowed along with any interest which is deemed to be non arms length. Any disallowance is done before considering any additional CIR considerations.

This is why it is important to make sure that companies are applying the appropriate benchmarking to show that the loan is done at market rate / as well as this, its important that they can show cash flow projections to ensure that the loans can be met