Transfer pricing adjustments and penalties

By Tolley in association with Pricewaterhouse Coopers

The following Corporation Tax guidance note by Tolley in association with Pricewaterhouse Coopers provides comprehensive and up to date tax information covering:

  • Transfer pricing adjustments and penalties
  • Compensating adjustments
  • Secondary adjustments
  • Amendments and consequential claims
  • Revised assessments and appeals
  • Penalties
  • Interest
  • Role of the senior accounting officer (SAO)

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. See INTM153270.

Compensating adjustments

If the adjustment to be made is between UK companies or individuals (a ‘UK-to-UK adjustment’) the 'disadvantaged person' involved in the transaction is able to calculate their tax by making a 'compensating adjustment' to their taxable profits or losses.

TIOPA 2010, s 174

The following criteria must be met for such an adjustment to be made:

  • only one of the parties to the actual provision made is an is an advantaged person in respect of that provision, and
  • the other affected person is within the charge to income or corporation tax in respect of the relevant profits, and
  • the advantaged person has made a return on the basis of the arm’s length provision

If a transfer pricing adjustment is necessary following the conclusion of an enquiry, but the disadvantaged person has already submitted a return for the relevant period, then the disadvantaged party will be able to amend their return to take account of the compensating adjustment.

Secondary adjustments

Secondary adjustments such as deemed distributions or deemed capital contributions are not made

More on Transfer pricing enquiries: