Transfer Pricing – the bad news and the good news

Transfer pricing is now the most important international tax issue for businesses, both large and small. It is not just the listed, multinational companies that this affects – owner managed businesses are now in the sights of HMRC.

Some countries exempt such smaller entities, however many do not, and those groups that are unprepared leave themselves open to a greatly increased risk of challenge by tax authorities. Whilst this in itself is a threat it also presents a positive tax planning opportunity.

We have witnessed a surge in investigations as tax authorities around the world increase their resources to tackle the issue of avoidance. Of particular importance is the fact that transfer pricing documentation submitted to the tax authority of one country will in many cases now be shared with other countries. A key point to remember is that when you sign a UK tax return, you are confirming that any transactions contained within comply with transfer pricing rules and that you have the correct documentation to support it. If you do not have an up-to-date local file and master file then it is unlikely that you are compliant and your return may be incorrect, which may have consequences.

Governments around the world have updated tax legislation and businesses need to comply or face aggressive investigations, harsh penalties, interest charges or high additional tax bills covering many years. The bad news is that in addition to financial penalties, businesses face the added danger of reputational risk and contagion – where tax authorities from other countries also investigate or the enquiries are broadened to include other areas such as VAT, customs duties or employment tax.

The good news
The good news is that many businesses can in fact make tax cost savings – simply by reviewing their transfer pricing strategy and ensuring transactions are priced correctly in accordance with the new rules.

Who is affected?
Generally groups of companies that meet one or more of the following criteria:
  • operations in more than one country;
  • transactions between group companies such as product sales, services, or financing;
  • sales through a website;
  • intangible property such as brands, trademarks, know-how, customer lists, or client relationships;
  • employees working or selling overseas.
What should businesses be doing?
An excellent starting point is for business to review their transfer pricing strategy and documentation. The new rules require profits to align with economic activity, and groups need to review their strategy for the pricing of transactions – or lack of it – between related parties. This typically means between group companies, but can include offices, permanent establishments and partnerships. Documentation then needs to be reviewed and updated to reflect the new rules.

Unlike in the past, this now means that many groups will no longer be able to rely solely on individual transfer pricing reports but rather a master file covering the whole group and local files for each country. In some cases larger corporates may also have to file a country by country report. There are currently discussions at the European Union as to whether such documents should be made public, and if this were to become law groups of companies would need to publish potentially confidential and sensitive financial, employment and tax details on their websites.

How can we help?
Our global transfer pricing specialists will work with you to provide clear, concise advice across the locations that your business operates.

You will have access to our expert team that includes members who were involved in drafting the UK transfer pricing rules whilst formerly employed at HMRC. Our experience will enable you to gain insight into the strategies of tax authorities and benefit from practical advice as to the best options available to you.
 
This article provides a brief guide to the key issues, but specific advice should always be sought. For further information, please get in touch with Ken Almand.  

 

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