Transfer pricing definition

View the related Tax Guidance about Transfer pricing

UK transfer pricing in practice

The UK transfer pricing rules require an adjustment of profits where a transaction between connected parties is not undertaken at arm’s length and has created a potential UK tax advantage. Transfer pricing is a specialist area in tax and relies on an experience of similar businesses and activities. The following therefore only outlines the transfer pricing process in practical terms to allow a non-specialist to understand the methodology of a transfer pricing review. The legislation defines an arm’s length price as the price which might have been expected if the parties to the transaction had been independent persons dealing at arm’s length, based on OECD guidelines. Application of an arm’s length principle under the OECD guidelines is based on a comparison of transactions between associated parties in a multinational enterprise (MNE) with the transactions which would have taken place between independent parties under the same circumstances; this is known as a ‘comparability analysis’. See INTM440000 onwards for details of the types of transaction which could give rise to transfer pricing issues.In order to undertake

Transfer pricing adjustments and penalties

As explained in the HMRC approach to transfer pricing enquiries guidance note, taxpayers are required to make a transfer pricing adjustment in their UK tax return if an increase in taxable profits or reduction in allowable losses would arise from arm’s length pricing being applied to transactions with connected parties, when compared to the actual pricing that has been applied by the parties. Taxpayers are not permitted to make an adjustment which results in decreased taxable profits or greater allowable losses, unless they believe they are not being taxed in accordance with the terms of a UK double taxation agreement and seek action under the Mutual Agreement Procedures. Compensating adjustmentsIf the adjustment to be made is between UK companies or individuals (a ‘UK-to-UK adjustment’) and the UK-to-UK exemption does not apply, the ‘disadvantaged person’ involved in the transaction is able to calculate their tax by making a ‘compensating adjustment’ to their taxable profits or losses. The UK-to-UK exemption applies to accounting periods beginning on or after 1 January 2026. If the exemption is available,

Transfer pricing and financing arrangements

Transfer pricing rules also apply to financing arrangements. Loans between connected companies where one of those companies controls the other, or where both are under common control, are subject to the regime. The transfer pricing legislation takes precedence over the loan relationships legislation and the rules on the corporate interest restriction. See the Corporate interest restriction ― overview guidance note. The same principles of transfer pricing, as set out in the UK transfer pricing in practice guidance note, apply to financing transactions. Additional details and examples are provided in Chapter X of the OECD Transfer Pricing Guidelines republished in 2022.One important aspect of transfer pricing for loans is thin capitalisation, ie a company does not have enough capital to support the debt. A company will be considered to be thinly capitalised where:•a loan exceeds the amount which the borrower would or could have borrowed from an independent lender, or•the terms of the loan differ from those that would have been agreed with such a lender, eg a higher interest rateFor

Transfer pricing rules ― overview

What is transfer pricing?Transfer pricing is the price at which an enterprise transfers either physical goods, intangible property or services, including financing arrangements, to associated enterprises. Generally, enterprises are associated if there is direct or indirect control by one of the enterprises of the other, or they are under common control. For these purposes, direct control means the ability to determine how the affairs of the company are conducted by virtue of the shareholding, voting rights or any powers within the articles of association or other document regulating the company or any other company. From 1 January 2026, it can also include where two persons are subject to an arrangement for common management. Determining whether indirect control exists depends on including rights and powers which are available in the future or which are held by other persons. Transactions made between the parent company and subsidiary may be subject to the UK transfer pricing rules, which could result in an adjustment being required in the UK corporation tax return if such transactions are not considered

Corporate debt ― overview

This guidance note provides an introduction to the provisions governing the taxation of debt for UK companies and also provides links to more detailed guidance notes dealing with those provisions.The taxation of corporate debt in the UK is complex. There are several different sets of rules governing the amount and timing of tax deductions available for interest and other amounts relating to corporate debt. These include:•the loan relationships regime•the corporate interest restriction (CIR) rules•transfer pricing and thin capitalisation requirements•a range of associated anti-avoidance measures ― it should be noted that there are regime anti-avoidance rules (RAARs) in CTA 2009, ss 455B–455D and related sections for loan relationships and in TIOPA 2010, s 461 applicable to the CIRIt should also be remembered that payments of interest by a UK company on all liabilities capable of remaining outstanding for more than one year are subject to withholding tax, unless they are expressly exempt or qualify for relief.Loan relationshipsIn most instances, a company’s financing costs

UK country-by-country reporting

What is country-by-country reporting?Country-by-country (CbC) reporting essentially requires large multinational enterprises (MNEs) to provide an annual return that breaks down the key elements of their activities among the jurisdictions in which they operate.For accounting periods beginning on or after 1 April 2023, additional transfer pricing documentation requirements are required for MNEs within the CbC reporting regime. For more information, see the UK transfer pricing in practice guidance note. The role of the Organisation for Economic Co-operation and Development (OECD)MNEs are under increasing pressure to operate in a fair and transparent way, with particular regard to the payment of taxes and making a fair contribution to public finances. Meanwhile, governments across the globe are under pressure to reduce public deficits, generate higher tax revenues and tackle international tax avoidance. In response to these issues, the OECD has developed a range of proposals as part of the wider base erosion and profit shifting (BEPS) project. The final package of recommendations was published by the OECD on 5 October 2015.CbC reporting is one of the areas covered

Unassessed transfer pricing profits (UTPP) — overview

What are the unassessed transfer pricing profits rules?The unassessed transfer pricing profits (UTPP) rules are an extension of the UK’s transfer pricing regime. These rules replace the diverted profits tax (DPT) regime, which was in force for diverted profits arising on or after 1 April 2015. See the Diverted profits tax (DPT) ― overview guidance note for details. The UTPP rules apply to accounting periods beginning on or after 1 January 2026. As there is no period of overlap between the two regimes, transitional rules have not been drafted. The UTPP rules aim to counter the use of artificial arrangements by multinational entities which attempt to side-step the UK’s transfer pricing rules to avoid paying tax in the UK. It is not a self assessment regime. Profits which should have appeared in the company’s tax return but were omitted or understated will be assessed by HMRC issuing a ‘preliminary notice’ within the corporation tax framework, but at a punitive UTPP rate. The rate is broadly the company’s underlying rate of corporation tax

DPT ― entities or transactions lacking economic substance

A charge to diverted profits tax (DPT) for an accounting period can arise if one or more of the following three scenarios apply:•a UK company uses entities or transactions which lack economic substance•a non-UK company uses entities or transactions which lack economic substance•a non-UK company avoids creating a UK permanent establishment (PE)FA 2015, s 77(2)This guidance note sets out details of the charge to DPT in respect of the first two scenarios. Detailed examples of section 80 and section 81 cases can be found in HMRC’s guidance at INTM489780 onwards, including the application to particular types of assets and industries.See the DPT ― avoidance of UK permanent establishment guidance note for details of the charge arising in the third scenario.FA 2015, ss 80 and 81 are an extension of the UK transfer pricing provisions in situations where profits are diverted from a company with a UK corporation tax presence, to related persons (related by the ‘participation condition’ set out below),

Nominal leases or peppercorn rents

OutlineThis guidance note summarises the implications of nominal or peppercorn rents for income tax, corporation tax, capital gains tax (CGT), stamp duty land tax (SDLT) and VAT purposes, with links to further content.Properties let at a minimal rent are also called nominal leases or peppercorn rents. This is the case where the owner of the property rents the property:•at a less than market value rent, or•by way of a ‘ground rent’ on a long leaseBoth will be taxable as property income. In the former case, an uncommercial rent may also have wider tax implications to consider.Ground rents on commercial property are a distinct charge from the leasehold charge. Ground rents will generally be regarded as being charged on commercial terms, even though they are generally negligible (or often not charged or collected) as they do not necessarily relate to any service provided to a leaseholder.Note that companies within the transfer pricing regime may also have to consider the transfer pricing provisions if a property

Cross-border financing

An overseas company may make a loan to a UK company in a number of circumstances, including:•when an acquisition is made by a subsidiary in the UK•to fund expansion or working capital of the UK companyPossibly the key tax consideration arising in the context of cross-border financing is the extent to which interest payable by the UK company to the overseas company will be deductible. The other tax point to consider is whether the UK payer needs to withhold tax on interest payments it makes.There are various elements of the UK tax regime that may restrict the deductibility of interest, such as transfer pricing, the corporate interest restriction and targeted anti-avoidance provisions. These are outlined below. Note that UK permanent establishments (branches) of overseas companies are subject to the same restrictions on interest deductions as UK companies. In addition, no deduction is available in respect of interest or other finance costs paid by the permanent establishment to its head office. Interest will only be deductible where the head office