Transfer pricing ― setting up overseas

By Tolley

The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Transfer pricing ― setting up overseas
  • General principles
  • UK rules
  • Relevant transactions
  • Transfer pricing adjustments
  • Funding the overseas business
  • Documentation requirements
  • Mutual agreement procedure

General principles

Transfer pricing tax rules exist to counter the opportunity for groups to reduce their global tax burden by shifting profits to low tax jurisdictions through group pricing, eg by selling goods at cost from a company in a higher tax jurisdiction to one in a lower tax jurisdiction. Without tax rules to counter this, the company in the lower tax jurisdiction would make higher profits through its lower cost of sales. The company in the higher tax jurisdiction would have minimal taxable profits that do not necessarily reflect the commercial risk and business undertaken.

Although transfer pricing rules affect the income reported in tax computations, and do not require the relevant businesses to actually charge an arm’s length price for the transaction, it is generally appropriate to calculate and charge arm’s length prices to ensure that where there is a tax charge in one country there is a corresponding deduction in the other country. A transfer pricing adjustment (increasing tax) required by one country in a tax return is not necessarily accepted by the other country as it would lead to a reduction in the tax take. Where the transaction has actually taken place on an arm’s length basis it is generally more straightforward to reflect the tax treatment in the two countries.

See the Overview of transfer pricing principles and Establishing an arm's length price guidance notes for further background discussion.

UK rules

In the UK, HMRC requires large companies to prepare their tax returns on an arm’s length basis, with the profits of transactions with associated enterprises to be calculated as though an arm’s length had been charged.

TIOPA 2010, s 147

Relevant transactions include services, transfers of goods, financing arrangements, anything where one company potentially confers a benefit on another.

TIOPA 2010, s 150

Small and medium-sized companies

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