Watson Buckle Blog
Complying with the Rules of Transfer Pricing
Transfer pricing relates to the price at which goods and services are sold between divisions of a company, or between companies in the same group.
Setting transfer prices has raised a number of issues - incorrect prices distorting reported performance by making some divisions more profitable at the expense of others, opportunities to avoid taxes by using artificial transfer prices to shift profits from high tax country to a low tax country. Artificial pricing can also be used for controlling shareholders to profit at the expense of minorities.
Most countries now have detailed rules governing the pricing of transactions between related parties. Usually tax rules, however they stem from the basic legal requirement that companies account for goods and services bought or sold regardless of whether those transactions are with third parties or other group members. Many countries also have formal or informal rules on compliance and operate penalties for non-compliance.
In the UK, transfer pricing rules apply to a wide range of transactions including those between two UK companies or between any person (including individuals and charities) and a company or partnership.
The rules cover almost everything from sales or purchases of goods and services, to intellectual property, debt or deemed transactions that are not reflected in any accounts.
The interaction with other areas of tax law can be complex with several special sets of transfer pricing rules for specific issues in different parts of the Taxes Acts.
So how can companies and individual comply with transfer pricing regulations?
Submitting a tax return is effectively a declaration that the results reported reflect arm's length transfer prices. HMRC may also then enquire into the underlying transactions and certain record keeping requirements exist. Speaking in broader terms these are sometimes referred to as the “transfer pricing documentation requirements”. There are similar rules that exist in many countries overseas.
In the consequence of a tax authority challenge by the HMRC, companies and individuals will need to defend their transfer pricing arrangements. HMRC has some detailed processes for pursuing transfer pricing enquiries and familiarity with these is often helpful.
Taxpayers are required to keep a record of why they believe they have complied with the arm’s length test, with a penalty of £3,000 per tax return for failure to keep proper records.
The UK’s penalty rules are tough – if understatement of UK tax is found to have taken place, either by negligence or fraud on the part of the taxpayer, the penalty is the equivalent of up to 100 per cent of the tax due.
For more information please contact us.
John Kinsella
Tax Partner
