Transfer pricing is a critical aspect of international taxation that often gets overlooked by businesses. However, understanding and managing transfer pricing is becoming increasingly vital, especially in a globalised economy where multinational corporations operate across various countries. Understanding Transfer Pricing... Read more
Transfer pricing is a critical aspect of international taxation that often gets overlooked by businesses. However, understanding and managing transfer pricing is becoming increasingly vital, especially in a globalised economy where multinational corporations operate across various countries.
Understanding Transfer Pricing
Transfer pricing refers to the pricing of goods, services, or intellectual property transferred between connected entities such as those within the same multinational group, but usually in different tax jurisdictions, although it can also apply to transactions within the same jurisdiction where different rates apply to each entity. It’s essential to establish prices for these transactions as if they were conducted between unrelated third parties, adhering to the arm’s length principle.
Exemptions
Exemptions from documentation rules are available for SMEs, dormant companies, charities, and life assurance companies based on EU criteria.
The exemption criteria are based on EU recommendation 2003/361/EC as follows:
- Small: less than 50 employees, and either turnover or gross assets not exceeding €10 million
- Medium: less than 250 employees and either turnover not exceeding €50 million or gross assets of less than €43 million.
However, HMRC can still require medium sized entities to produce documentation at their request and therefore it is a recommendation that the documentation is prepared, and the transactions reviewed before the threshold for exemption is exceeded.
Why is Transfer Pricing Important?
Legal Obligation: The UK’s transfer pricing rules are not optional; they are a legal requirement. Failing to comply can lead to penalties and potential legal consequences.
- Risk Management: Understanding and managing transfer pricing allows your business to mitigate risks associated with tax audits and disputes. Penalties for non-compliance can be substantial.
- Documentation Requirements: Adequate transfer pricing documentation is critical. The UK follows the OECD’s Master File and Local File templates, which must be prepared and provided to HMRC upon request. This documentation helps prove that your pricing is consistent with the arm’s length principle.
- Transparent and Responsible Business Practices: Proper transfer pricing demonstrates your commitment to ethical and transparent business practices. In an era where stakeholders, customers, and investors value corporate responsibility, this can be a significant advantage.
- COVID-19 Impact: The economic fallout of the pandemic has led to increased scrutiny of transfer pricing.
- Tax Efficiency: Effective transfer pricing can help optimise your global tax position. By setting prices that align with the arm’s length principle, you can potentially reduce your overall tax liability.
- Opportunities for Advance Pricing Agreements: By actively managing your transfer pricing, your business may have the opportunity to enter into Advanced Pricing Agreements (APAs) with HMRC. APAs offer certainty regarding your transfer pricing arrangements.
The Bottom Line
Transfer pricing regulations are not static; they evolve over time and therefore it is imperative for your business to take this seriously. Ensuring compliance through comprehensive documentation not only safeguards your company’s financial health but also fosters a good working relationship with tax authorities.
Transfer pricing advice from our experts
Where groups do not currently have defined transfer pricing policies, our specialists can assist in understanding intercompany arrangements and preparing transfer pricing documentation. For groups with existing policies, we can review and provide recommendations to help ensure that these reflect any changes in the group and are aligned with the latest transfer pricing guidance. As members of Alliotts Global Alliance, we also have access to a network of local specialists and can coordinate transfer pricing reviews and documentation in multiple jurisdictions.