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.
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:
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.
*The Organisation for Economic Co-operation and Development
Currently there is no mandatory format for transfer pricing documentation in the UK but from April 203, 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.
At Price Bailey, we have considerable experience with transfer pricing.
Our recent work includes:
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.
For further information, please contact Jay Sanghrajka or Sarah Howarth.
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