Overview of transfer pricing principles

By Tolley in association with Robert Langston of Saffery Champness

The following Corporation Tax guidance note by Tolley in association with Robert Langston of Saffery Champness provides comprehensive and up to date tax information covering:

  • Overview of transfer pricing principles
  • Introduction
  • Transfer pricing glossary


Transfer pricing refers to the pricing of goods, services, funds, and tangible and intangible assets transferred within a group, and between connected parties. Since the prices are set with the mutual agreement of the parties, they are not subject to normal market pressures that establish prices for similar transactions between third parties.

Transfer pricing rules in the UK and elsewhere require that transactions between connected parties should be recognised for tax purposes by applying the amount of profit that would have arisen if the same transaction had been carried out by unconnected parties. This is referred to as the 'arm’s length principle'. The arm’s length principle is endorsed by the OECD (Organisation for Economic Co-operation and Development) and enshrined in the Associated Enterprises Article of the OECD Model Tax Convention.

As part of the OECD’s base erosion and profit shifting (BEPS) project, changes have been proposed to the Transfer Pricing Guidelines. These will affect most areas of transfer pricing, including documentation. See the OECD’s final report on Actions 8–10 , published in October 2015.

The implications for corporation tax purposes are that adjustments may be required in the tax return and supporting computations to ensure that arm’s length pricing is reflected in the overall tax position of the companies affected. There are penalties for non compliance with the transfer pricing legislation. For more information, see the UK transfer pricing rules and Establishing an arm's length price guidance notes.

A final BEPS report on dispute resolution in transfer pricing and other treaty-related areas was published by the OECD in October 2015 ― see Action 14 . As a direct consequence of this report, HMRC issued a revised statement of practice on Mutual Agreement Procedure (MAP) in SP1/2018  on 20 February 2018. The revised Statement of Practice, which supersedes SP1/2011 (subscription sensitive), is intended to be read in conjunction with INTM 423000 et seq. For further information, see the Transfer pricing ― setting up overseas guidance note.

Most countries (other than the United States

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