Corporation Tax

UK transfer pricing in practice

Produced by Tolley
  • 21 Dec 2021 16:32

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

  • UK transfer pricing in practice
  • Understanding the value chain of the business
  • Value chain analysis and intangibles
  • Review the transfer pricing policy
  • Maintaining intercompany agreements
  • Transfer pricing documentation
  • Transfer pricing enquiries and advance pricing agreements

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 a comparability analysis, the business must review the commercial and financial relationships between associated parties to establish:

  1. the contractual terms

  2. the functions performed by each party, what assets are used and what risks are taken on

  3. the characteristics of property transferred or services provided

  4. the market in which the parties operate

  5. any business strategies pursued by the parties, eg market penetration

TIOPA 2010, s 164

This is known as a functional analysis.

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