Transfer pricing services

Transfer pricing is increasingly in the spotlight with tax jurisdictions focusing on cross-border transactions in an attempt to clamp down on abuse and compliance weakness.

But what does transfer pricing really mean? It refers to the pricing of transactions between related parties, covering such diverse areas as goods and services, intangible property, and loans between associated entities.

Who needs to consider transfer pricing?

All businesses operating internationally, or even just within the UK, potentially need to consider transfer pricing. While under UK domestic law there is a “small and medium sized enterprises exemption” from the requirement to apply transfer pricing, the SME exemption does not apply to:

• Transaction between UK entities and related parties resident in territories with whom the UK does not have an appropriate non-discrimination clause in its relevant double taxation agreement
• Any transactions caught by the relatively new “profit fragmentation” rules effective from 1 April 2019.  

Equally, there may not be any such exemption in the territory of the counterparty to the transaction, meaning that overall its arm’s length nature still needs to be considered. 

UK transfer pricing rules are modelled on the standards developed by the OECD*. Any transfer pricing study will require both a functional and economic analysis to inform the “transfer price”, and to guide the business’s legal advisors in preparing the associated intercompany agreements.
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*The Organisation for Economic Co-operation and Development

Currently there is no mandatory format for transfer pricing documentation in the UK but from April 2023, the largest taxpayers will be required to use the prescribed OECD “master file/local file” approach.

The business must then implement the agreed policy, maintaining documentation year on year, and ensuring the policy is updated to reflect material changes in operating model; Topical considerations in this regard might include business changes in reaction to Brexit and the COVID pandemic, as well as “digitally nomadic” employees creating a corporate presence in additional jurisdictions.

The fixed penalty for failure to keep or produce transfer pricing records is currently £3,000, but with proposals to move this to a tax geared penalty basis from April 2023.  There are also additional tax geared penalties for careless or negligent (and potentially concealed) errors in establishing an arm’s length price which lead to a loss of UK tax.

Recent transfer pricing work

At Price Bailey, we have considerable experience with transfer pricing.

Our recent work includes:

• Assisting a multinational group with a transfer pricing study, covering policies, benchmarking and putting suitable agreements in place. These covered management services, equipment rental equipment and inter-company loans.
• Assisting a US-based oil company on a benchmarking study, as well as adopting consistent transfer pricing policies on a group-wide basis.
• Preparing a transfer pricing report for an Indian multinational on group-wide charges for senior management services across a number of different jurisdictions
• Advising an international fund on the appropriate methodology for internal pricing and cost-splitting including benchmarking, analysis and ultimately preparing the tax computations for the UK : Singapore transfer pricing adjustments required for their local filings.

Our expert advisers can help

By carrying out comprehensive transfer pricing studies, we can help you establish, justify and continually evaluate your inter-company transactions and relationships, making sure they are conducted at arms-length and reducing any tax risk.

Our extensive IAPA network enables us to access expertise in other jurisdictions as required to facilitate a bilateral or multilateral approach.

Our service can include:

• valuating the tax implications of related party transactions
• reviewing your international market entry or evolution strategy
• pinpointing your UK transfer pricing obligations, including any reporting required under country by country reporting (“CBCR”) or DAC 6
• establishing the interplay of transfer pricing with other regimes which may impact the UK corporation tax filing position, for example, corporate interest restriction
• highlighting potential withholding tax implications of related party transactions and advising on mitigating strategies
• considering methods of comparability
• assessing whether existing policies are appropriate
• determining whether you are charging an arms-length price
• creating a transfer pricing report on the functions and risk analysis
• recommending new policies and agreements
• advising on the implementation of new transfer pricing policies
• analysing competitor margins and the potential benefits of outsourcing

For further information, please contact Jay Sanghrajka or Sarah Howarth.