Overseas tax - Chapter 6 - 7 - TP

Question 1

When do transfer pricing rules apply?

Answer 1

The UK transfer pricing rules apply for Corporation Tax purposes to UK companies where:
- There is a transaction or arrangement between connected persons (‘the actual provision);
- The actual provision between the two parties differs from the arm’s length provision;
- The company is not exempt from the legislation.

Adjustment is made only when a UK tax advantage has arisen

Question 2

What are the two exemptions to transfer pricing rules?

Answer 2

1. Exemption for dormant companies
2. Exemption for Small & Medium companies

Question 3

When would the TP exemptions not apply?

Answer 3

1. If the company elects for the exemption not to apply
2. If the other party is resident in a non-qualifying territory
3. A Medium sized company would not be exempt if they have had a TP notice issued to them

Question 4

When might a company make a corresponding adjustment and what does this allow a company to do?

Answer 4

Where the advantaged party has been obliged to make a TP adjustment and the disadvantaged party is also subject to CT then the disadvanaged party may make a corresponding adjustment in their tax return.

The disadvantaged party can make a balancing payment to the advantaged person up to the value of the corresponding adjustment without either party suffering any UK tax consequences.

Question 5

What are the five transfer pricing methods?

Answer 5

1. Comparable uncontrolled price (CUP) method - Third-party price (HMRC preference)
2. Resale price method (RPM) - UK Selling price less costs and o/s profit (Most suitable for marketing or distribution operations)
3. Cost plus (C+) method - Manufacturer’s costs plus reasonable profit (Most suitable for manufacturers and intra-group service transactions)
4. Transactional profit split method - Split profit between various different enterprises involved with the product
5. Transactional net margin method (TNMM) - Profit computed taking % of either turnover or capital employed (Not favoured by HMRC)

Question 6

What is an adavance pricing agreement (APA) and what are some key details to note for APAs (8 points)?

Answer 6

An APA is an agreement with HMRC to agree TP methodology prior to implementing to avoid any uncertainty.

Key points to note:
1. Initial approach to HMRC is informal as an ‘expression of interest’ to enable HMRC to consider if the transactions are suitable
2. APAs are not compulsory
3. APAs are binding once agreement is entered into
4. If suitable, a formal application for an APA must be made in writing setting out the transactions to be covered, why the company thinks they give rise to TP issues and how the companys plans to deal with them
5. The term is usually 3-5 years
6. Renewal should be made within 6 months of expiry of an APA
7. If a company fails to comply with terms this can be rekoked by HMRC
8. Penalty up to £10k can be applied if false or misleading information is provided in connection with APA application

Question 7

What are OECD’s three-tiered standardised approach to TP documentation?

Answer 7

UK companies in multinational groups with consolidated group turnover of EUR 750m or more are required by law to keep the following documentation (Only master and local file):

1. Master file - Contains high level information relevant for all group members;
2. Local file - Specific material transactions to the local taxpayer;
3. Country-by-country report - Contains information relating to global allocation of the groups income and taxes paid.

Question 8

What are the three considerations when deciding whether a TP adjustment is necessary in respect of a loan between connected parties?

Answer 8

1. Would the loan have been made;
2. The amount for which the loan would have been made;
3. The rate of interest or other terms that would have been agreed.

in the absence of the special relationship between the parties.

Question 9

What are the three considerations when deciding whether a TP adjustment is necessary in respect of a guarantee between connected parties?

Answer 9

1. Would a guarantee have been provided in the absence of the special relationship between the parties;
2. The amount that would have been guaranteed;
3. The consideration that would have been required for the guarantee and other terms that would have been agreed.

Question 10

What are the two points to consider under OCED guidelines when pricing intra-group services?

Answer 10

1. Has an intra-group service been rendered?

Must consider whether an independant company would have been prepared to pay for such services in a simialr situation. If yes, then an intra-group service has taken place.

2. What’s the intra-group charge using arm’s length principle?

Two methods:
- Direct charge - Must be a similar charge to a third party company (CUP would be avilable if this is the case)

• Indirect charge - Used when direct charge cannot be determined.

Question 11

What documentation do HMRC typically expect with cross-boarder transactions?

Answer 11

Typically with cross-border transactions, HMRC would expect a bilateral agreement so that the other fiscal authority is also bound by the pricing methodology.

However, HMRC may accept a unilateral agreement where this is not possible.