Transfer Pricing (TP) is the area of international tax concerned with the pricing of intragroup transactions and, as such, something that pretty much any company with an international footprint needs to consider.
Historically, smaller international businesses may not have been subject to the level of scrutiny that larger inbounds or listed companies have, and therefore, could have concluded that central material prepared by their HQ was sufficient to support their UK TP position without further localisation (for example on the basis of group-wide materiality), or furthermore, that all transactions with group companies are done on the same terms as with third parties and that therefore TP analysis was redundant. Whilst the above may still hold true for some, the Base Erosion and Profit Shifting (BEPS) project that the OECD embarked on between 2013 and 2015, has raised the profile of TP and undoubtedly changed the international tax landscape. With an ever-growing list of considerations that international businesses need to monitor and comply with, taxpayers of all sizes should reassess whether their approach is still adequate and fit for purpose. Examples of some of these, at different levels, are:
The direction of travel is towards greater transparency, with increased public access and with more information available to tax authorities than ever (directly collected from taxpayers, but also from other tax authorities through exchange of information provisions). Businesses should assess carefully the extent of the support required, ensuring that it is proportionate to the size and complexity of the transactions, but that it is an accurate reflection of the underlying facts and analysis, ultimately evidencing compliance with the arm’s length principle, which is the basis of TP. This is consistent with the approach taken by HMRC in the UK.
In some cases, various stakeholders will require further education (e.g. finance directors, boards) about the complexities of current tax requirements, as well as requesting access to more detailed information than has previously been provided centrally to ensure compliance and minimise risk of challenge. This is particularly true for inbounds with limited UK tax/TP specific resources that rely on central TP documentation and with limited visibility on overseas structures.
We work with many of these businesses in the UK, and experience has shown us that a proactive assessment can help not just to take more informed decisions and potentially identify opportunities; but also in the case of an enquiry, where tax authorities are likely to look at the level of ‘carelessness’ exercised by taxpayers and where without evidence of the contrary, more severe penalties can be awarded.
